Sure, Dow 10,000 gives me goose bumps, too. But how soon
we forget: It was only a few months ago that Dow
5,000was on everyone's mind.
Optimism can be fleeting, Fools: Just because Dow 5,000
seems to be in the rearview mirror doesn't mean stocks won't
plummet from here. In fact, the worst could still be
ahead.
And history agrees.
                                                                         Â
What goes up
... Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â
The history of long-term market downturns is hideous.
When times are bad, markets don't just get drunk with fear --
they start downing vodka shots of fear. When panic sets in,
nobody wants to own stocks at
anyprice. Investors' palms begin to sweat every time
they watch CNBC. They bury their heads in the hope that the
pain will go away. They throw in the towel and sell
indiscriminately. Stocks hit the pavement and stay there not
for months, but
years. Â
Don't believe me? Have a look at the average
price-to-earnings ratio of the entire S&P 500 index over
these three periods of market mayhem:
Period
Average S&P 500 P/E Ratio
1977-1982
8.27
1947-1951
7.78
1940-1942
9.01
And while stocks have plummeted over the past year, so
have corporate earnings: The S&P 500 currently trades at
around 20 times earnings. Compare that with the above table,
and it's pretty apparent that stocks could fall much, much
further, just by returning to the lows around which they
historically hover during downturns.
Assuming earnings stay flat, revisiting those historically
low levels could easily mean a 50% decline from here. Easily.
Now, I'm not predicting, warning, or forecasting -- I'm just
taking a long look at history.
But what if it did happen? Â
What would happen to individual stocks? Here's what a
few popular names would look like trading at P/E ratios of
8:
Company
Decline From Current Levels With P/E of
8
Microsoft (Nasdaq: MSFT)
(50%)
JPMorgan Chase (NYSE: JPM)
(85%)
Bank of America (NYSE: BAC)
(74%)
IBM (NYSE: IBM)
(42%) Continued... |