Historical Arguments for What the Stock Market Bottom Will Look Like

Stock markets have already seen a huge decline but has the bottom been reached yet? A couple of commentators with serious-looking historical data and credentials seem to say probably not.

Yale prof and Irrational Exuberance author Robert Schiller in this short note and video interview on Yahoo Finance says the current S&P 500 P/E ratio (calculated using his Cyclically Adjusted P/E Ratio - CAPE - which averages the last ten years instead of only the most recent year) of just under 14x indicates there is likely some way to go - he's looking at 10x, which would mean almost a 30% further drop from where we are today. Yikes! That would entail the S&P 500 at 550 or so. If the TSX followed suit, the TSX Composite would go down to 5600.

A similar view is the cheerily titled While Rome Burns by John Mauldin on the Big Picture blog. Two of charts titled Reversion Beyond the Mean near the bottom of the long post shows how the S&P 500 has overshot what is termed long term average P/E value of 18x in past major crashes to go below 10x.

These values are not too far off the study by the IMF I noted in Recession to Last 2-3 Years? back on October 28th, which related average stock market declines of 50% in a credit cum real estate crunch.

To use an airplane analogy, we are in the midst of severe turbulence, a number of passengers who had not fastened their financial seatbelts have been bruised, people are screaming and scared for their lives. The heartening thing to remember is that as long as our "pilots" don't screw up, planes rarely (11-13% of the time according to Wikipedia) if ever crash because of weather. More than half the time it is pilot error. Are Harper, Brown, Obama, Hu, Merkel et al going to be good enough under pressure?