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We’re Not Out of it Yet

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With all the talking heads saying the markets have turned the corner, and we’re on our way out of a recession, Barry Ritholtz gave his readers yet another cold shower of reality. He looks at a variety of data, summarizing,

Its hard to really say that stocks are cheap here. At best, I believe we can argue that — assuming that historically high earnings do not fade — that stocks are not terribly expensive.


These are not the sorts of valuations you find at the end of Bear markets.

Regarding market valuation, he points to the Wall Street Journal‘s Market Data Center and its P/E ratios of the major indexes. This shows the markets are still highly overvalued and provide great support for his comment on valuations. The ratios, because of their large differences to future and expected values, indicate the markets still should head lower. (Ritholtz’ firm is bullish short-term, but bearish of the intermediate- to long-term.)

So how does the market valuation affect the economy? It mostly has to do with investor expectations. Even those that subscribe to beliefs that the economy is so vast that it can absorb multiple pressures and continue to grow have run into continued bad news. This week, commodities continue at all time highs pressuring companies and people on Main Street. Gasoline just reached an all-time high according to AAA. Just yesterday, pending home sales hit an all-time low. Home builders do not see a recovery well into 2010. In general, this drives spending down, which makes the continued record profits on Wall Street seem more unlikely.

If we’re pulling out of a recession, it is not clear. We don’t even know if we’re in one according to normal metrics. Traditional economics views a recession as a shrinking of the economy (a negative GDP growth figure) for two consecutive quarters. Difficulty of measurement, possibilities of revised numbers, and delay on information of this sort will prevent us from knowing for sure about a recession until at least this summer.

One thing we do know is that we are in a bear market. I posted on this at the end of March, noting a graph of the DJIA since 1900 and the tendency for bear markets to have flat-line growth over 10-20 years. If the last bear market began at the beginning of this decade, with the burst of the dot-com bubble, a turn to a bullish market would mark the shortest bear market for the Dow of the last century (at least over the period of the graph).


Written by walonline

April 9, 2008 at 9:47 am

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