The bad news is that the market tanked today. But the good news is that the S&P 500 is back to where it was in 1999. Why is this good news? The reason why is because it means we've all seen these sharp sell offs plenty of times now over the past 12 years of stagnant returns, volatility, and a steady drum beat of terrorist attacks, wars, recessions, spiraling unemployment and back to back financial crises. Today is not all that unusual in the context of this secular bear market we've been caught in.
But what if it is different this time, and unlike the situation in 1999, we're really and truly heading over a cliff? That could be the case - nobody knows for sure, but there are a couple of other things are different about now, verses 1999. For one thing, the P/E ratio for the S&P 500 is about 12, the earnings yield is well over 8%, reflecting an astonishing 350% risk premium over US Treasuries, the index trades at just two times book value, and earnings growth is clocking away at a healthy 10%. In other words, for every dollar you invest in the S&P 500 today, you could (in theory) expect to make your investment back within about four years, as opposed to the thirty one years it would take you to earn back your initial investment on a ten year US Treasury. Viewed that way, stocks are now about 8 times cheaper than their so-called "risk free" counterparts.
To that extent, I agree that it is different this time around. But some things never change. That is, fear and greed move the market on a day to day basis - even a year to year basis, whereas valuation is pretty much worthless unless you're looking at things in ten to twenty-year slices of time (or, if you ask one friend of mine, maybe hundred year slices of time or even more).
Stepping back, what's going on now is that the financial market is terribly, terribly ill, and if there is any cure, it will take years if not decades to work. But that is not the issue. The issue is that the market has not yet learned to cope with its illness, but given time, we will all learn to live with the high unemployment, overextended and rotten leverage, fiscal austerity, deficits, slow growth and the uncertain promises of a bleak future. But somehow, the sun keeps rising in the morning each day, companies keep building and selling and earning money for their shareholders. But this is not a time when investors are thinking long term - not with the scars of 2008 and 2009 so fresh.
Here we go again.
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