The Good News about Depression

Here we go again.  February ended in disaster.   The S&P lost 4.5% for the fourth and final week of the month.  For the month, the S&P lost 11%, its worst February since the 1930’s.  It’s declined for 7 out of the first 8 weeks of the year. 

The fundamentals were bad, as usual.  The economy is showing signs of slipping deeper and faster into a downward spiral.  The Case-Shiller index revealed another month of record-setting price declines.  New and existing home sales volumes continue to erode.  This is especially worrisome given that prices are plunging; the implication is that prices must fall some more (much more) to clear the market of unsold new and existing homes.  Durable goods orders dropped and consumer confidence fell off a cliff, signalling even more trouble ahead for consumer demand.  Weekly claims spiked to 667,000–the worst since 1982.  And the revised Q408 GDP report came in at a staggering 6.2%, also the worst since 1982.

Corporate earnings continued to disappoint.  Target, Home Depot, Safeway, Dell and many others reported results that were below expectations.  To add insult to injury, dozens of major firms began to cut dividend payouts; Ameren, GE, Gannett, and Textron announced reductions that were not well received by shareholders. 

Technically, the S&P breached an key support level:  it took out its November 2008 low.  This means that a lot of traders will now be even quicker to sell because the 742 low from 2008 was widely viewed as a critical line in the sand; now that it’s been crossed, the perception is that there is no nearby level of support.  To technicians, it’s look out below!

From a historical perspective, the current drop is astounding.  At 735, the S&P is down 53% from its peak in October 2007.  Officially, this bear market is now the second worst ever, trailing only the bear market of the Great Depression when it fell 89% (using the Dow, because the S&P500 was not yet in existence). 

But here’s some good news:  the peak-to-trough drop from September 1929 to July 1932 consumed 2 years and 10 months.  Today, with February concluded, we are 1 year and 4 months into our bear market.  So if we assume that our current bear market will be no worse than the 1929-1932 bear market , then we could reasonably argue that today we’re in the fifth inning of our bear market.

So regardless of the severity of the drop to date, and regardless of the currently depressing economic news, we could see the end of this bear market sometime later this year, and possibly early next year.

Now that’s something to look forward to!

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