In 2008, the U.S. stock market went from gangbusters to just plain busted: The world’s most watched equity index, the Dow Jones Industrial Average, plummeted 30%, while the S&P 500 plunged 45% to an 11-year low. All in all, it was the most severe annual loss for both indexes since the Great Depression. Does it mean that the stock market is under valued ? Is this the best time to load up stocks ?
As you can see, present stock market valuations are nowhere near the underrated levels reached in 1932, at the end of the Great Depression. Not only that, they still stand well above the “Normal Range” of valuation seen during the bulk of the market’s existence.
Make no mistake: No matter how powerful and persistent the bear market rallies are from this point forward, this is still very much a bear market.
Source: Elliott Wave
Nouriel Roubini is a Professor at the Stern School of Business at New York University. His analysis appears regularly on his blogsite, Global EconoMonitor.
Last week’s prediction was particularly dire and is worth reprinting here:
“It is increasingly clear by now that a severe U.S. recession is inevitable in next few months…I now see the risk of a severe and worsening liquidity and credit crunch leading to a generalized meltdown of the financial system of a severity and magnitude like we have never observed before. In this extreme scenario whose likelihood is increasing we could see a generalized run on some banks; and runs on a couple of weaker (non-bank) broker dealers that may go bankrupt with severe and systemic ripple effects on a mass of highly leveraged derivative instruments that will lead to a seizure of the derivatives markets… massive losses on money market funds with a run on both those sponsored by banks and those not sponsored by banks; ..ever growing defaults and losses ($500 billion plus) in subprime, near prime and prime mortgages with severe knock-on effect on the MBS and CDOs market; massive losses in consumer credit (auto loans, credit cards); severe problems and losses in commercial real estate; the drying up of liquidity and credit in a variety of asset backed securities putting the entire model of securitization at risk; runs on hedge funds and other financial institutions that do not have access to the Fed’s lender of last resort support; a sharp increase in corporate defaults and credit spreads; and a massive process of re-intermediation into the banking system of activities that were until now altogether securitized.”
Reality has finally caught up to the stock market. The American consumer is underwater, the banks are buried in dept, and the housing market is in terminal distress. The Dow is now below its 200-Day Moving Average — the first big “sell” signal. Anything below 12,500 could trigger program-trading and crash the market. The increased volatility suggests that we are watching a “real time” meltdown.
Recommendations:
Short housing sector, financial sector (banks & credit services) and retailers.
