Today's Bear Market: Fundamentals Crumble Beneath Prices

Over the weekend, Paul J. Lim wrote in the New York Times:

If there’s a silver lining to bear markets, it is that they make stocks cheap for the next wave of investors. But so far in this downturn, it isn’t working out that way.

Based on the price-to-earnings ratio, stocks have actually become more expensive even as share prices have come tumbling down. In fact, the P/E ratio for the Standard & Poor’s 500-stock index, based on earnings over the previous four quarters, has risen to just over 24 from around 19, according to S&P.

Superficially, that's correct. The problem is that the earnings decline is heavily weighted toward certain sectors -- most particularly financials.

We don't have the final numbers in yet, but the earnings of the financial stocks in the S&P 500 will probably be about -0.01. The S&P 500 Financials Index is currently around 300. So that's a P/E ratio of... negative a lot. Consider that financials make up about 16% of the index, and I think we've found the squeaky wheel. Compare that with Health Care which is currently going for 15.6 times earnings or Staples (18.0), Tech (18.1) and Industrials (13.8).

Bear markets generally come in one of two forms. Either stock prices shoot past reality as they did in 1987 and 2000, or fundamentals crumble beneath prices, which is what happened in 1990 and is happening again.

Comments

[PAUL&&SHARK:]

Why to buy now,if next year the blue chips will be half from today on average.It makes no sense to buy when nobody sold yet,let's wait for the blood to fill the pits,when I promise you will hear of Buffett more.

2008 Sep 10 07:47 AM

[daytrader:]

paul&$shark are 100% right!while the blood is filling the pits,short the markets.not blindly.get in,get out,make a couple of bucks,&go out&enjoy yourself.guys like steve leisman from cnbc&alan greenspan;etc;talk in riddles.what world do they live in?they never worked for a living;never struggled.the hell with them!

2008 Sep 10 11:59 AM

[daytrader:]

to paul&$shark

GREAT WEBSITE!

2008 Sep 10 12:00 PM

[Hedged In:]

Paul & Shark -- I like your comments, but they'd be much easier to read if you left a space after each comma. Space bar not working?

2008 Sep 11 02:52 AM