Will Global Equity Markets Pass or Fail Today's Test?

Friday is shaping up to be a crucial testing day for the global equity markets. The S&P 500 is down 10% since election day, which Bespoke Investment Group notes is the worst two-day showing since 1987:

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Almost every sector has approached the lows of October, and the S&P is a mere 50 points from its own closing lows. Relative strength is fading rapidly, as less than 38% of stocks are trading above their 20-day moving averages.

Given the daily volatility we’ve become accustomed to, the market could easily test its lows if it starts lower today. There are several forces at work which are throwing off our pulse-taking ability in the market right now; between tax-loss selling, capital gains harvesting (you never know), de-leveraging, and hedge/mutual fund redemptions we’re already caught in crosswinds. Add in the fact that few CEOs seem to be brave enough to call the coastline for 2009, and we’re largely left to our own devices to determine the “E” in the P/E ratio.

Into the Ring

Today is shaping up to be a big battleground session. Everything you thought was on sale two weeks ago “but started to run away” has come back to you. We knew there was a global recession coming two weeks ago, and we know it now.

However, in the last two weeks, we’ve seen major rate cuts in Europe, Asia, and the U.S., and we’ve seen LIBOR rates drop nearly 200 basis points. New fiscal stimulus and infrastructure spending have been discussed, and commercial paper issuance has risen dramatically. My point is that good things have happened in the past two weeks.

Yes, we’ve heard plenty of bad news and lots of weak guidance. However, is it 38% worth, the drop in the benchmark index this year? For my part, even when I model extremely weak earnings figures for 2009 - and this goes for hundreds of quality companies - I get earnings multiples of 14-19 times, which is well within the historical ranges for trough earnings. Now that’s a key distinction…if we believe 2009 is a trough year, then we can begin to find a range of earnings estimates we can work with. However, if we feel that this recession could not even hit its midpoint until tail end of 2009 or later, then all bets on trough earnings are off.

We know there’s capital out there; whether or not it’s willing to commit today and suppress the automated selling activity just might give us the answer.

Comments

[peterthepai...:]

if they gon be automated sellin activity if we wait and not commit...why would we not wait?

2008 Nov 07 08:26 AM

[jimmy Turano:]

Nov.7th, 2008 The turbulence that hit the Dow prior to election will be nothing compared to the after shocks that are headed our way.
Raising of taxes, capital gains, and chronic unemployment, will only add to the high waves of foreclosures. By the time Obama is sworn in office the tides of recession will begin to turn to massive inflation. The jubilant backers of Obama and the Democrats after the inaugural ball will begin to feel the process of a sobering depression within 4 months and the realization of the true definition of what FEAR means.
Feelings of being overwhelmed will take over as Foreclosures increase, retirement portfolio's decrease further due to market reaction of instability, and unemployment sky rockets.
Within 60 days the Dow will be hit several times more, setting the stage for public out cries and demonstrations.
We will see the final wrath from all the Banks,CEO'S, Fannie & Freddie, the Wall street debacle, and Washington's House representatives
miss-doings, while they remain in charge.
We will see 'CHANGE' like we never expected, and I fear the worse is yet to come.
ALL THOSE WONDERFUL CITIZENS WHO STOLE FROM THE AMERICAN PEOPLE, EITHER RETIRED RICH, OR THEY STILL REMAIN WITH THEIR POSITIONS TO CONTINUE TO EXERT THEIR POWERS. THE DEMOCRAT GANG JUST GOT STRONGER UNDER 'OBAMA' AND WE WILL BECOME A SOCIETY OF EITHER RICH OR POOR, WHILE THE MIDDLE CLASS ERODES TO THE POOR LEVEL.
*This is not a time to invest or bottom fishing as they say, because the tidal waves of distress are still on its way".
You notice, no one to date has elected a committee, to go after those on Wall street or in Congress who are responsible for the WORLDS BIGGEST ROBBERY IN HISTORY.
THE SINK HOLE OF RECESSION TURNS INTO A WORLD DEPRESSION.

2008 Nov 07 08:41 AM

[Crank Monkey:]

The S&P 500 probably has another 40% to go on the downside.

2008 Nov 07 08:46 AM

[damienhaas:]

The PE in a secular bear market like this would be around 10, instead of 14 and 19. Maybe there are more chips to fall.

2008 Nov 07 08:50 AM

[prudentinve...:]

Having been in the market for over 3 decades, I remember when PE of 8-10 was the norm. Your notion of 14-19 relates to the bubble era.

2008 Nov 07 08:56 AM

[herbert hoover:]

Why would anyone buy equities today when they can get then 40 to 50% cheaper in a month? Can you say deflation?

2008 Nov 07 09:15 AM

[doubleguns:]

Why? Why even try to figure P/E. Without a good understanding of the E the P is just piss in the toilet. Flush it and be done with it for now. When we get a better handle on the E we can see if the P/E makes sense. By that time a P/E of 5 might be the norm.

2008 Nov 07 03:56 PM

[investor88:]

Ryan seems optimistic but readers are skeptical and cautious. Dow 5k, p/e 5x or 8x being discussed more often. Not time to be a hero yet.

2008 Nov 07 07:25 PM