Bear Markets Do Not End With Stocks Still Trading at Nearly 20 Times Earnings

Yesterday might turn out to be an important day. The market should have bounced. It didn't. Instead, it fell 29 points. It's September, too...a dangerous month. And this rally has already run longer than the rally following the '29 crash.

Mr. Market can do what he wants, of course. We're just trying to read his mind. If we were Mr. Market, what would we do? We'd give investors a fright!

Two things make us think the bear market is not over.

First, there is market history. Bear markets do not end with stocks still trading at nearly 20 times earnings and the dividend yield barely at 3%. And they don't end when people are hoping, praying and expecting them to end. They end in despair...after people have given up hope. They end with dividend yields over 5% and prices at only 5 to 8 times earnings.

What's more, stock market trends tend to follow long cycles. The last bear market bottom was in '82. It came after 14 years of disillusionment and disappointment. By the time stocks were ready to go up investors were sick of hearing about them. And then, you could buy some of the best companies in America for only 5 times earnings...and get paid to hold them, with dividend yields over 5%.

By our calculation, the bear market in stocks began in January of 2000. Since then, stocks went up in nominal terms. But adjusted for inflation, investors made nothing. Still, they didn't seem to notice...and remained enthusiastic about stocks. Then, in 2007, a new down-cycle began...continuing until March of 2009, when the Dow hit a bottom at around 6,950. But was it THE bottom...or just a temporary bottom?

Most likely, it was a temporary bottom...a ledge from which investors could leap...before falling further down.

We say that because stocks never went low enough to qualify for a genuine bottom...and investors never showed the kind of disgust that you usually get at real bottoms.

We say that, too, for a second reason - the economy. In order to have a booming stock market, you need a booming economy. Earnings need to go up. That justifies higher prices. It also contributes to the positive mood among investors that persuades them that things are getting better and better...and that stocks deserve not only higher prices corresponding with their higher earnings, but also higher P/E multiples. That was the kind of mood that sent the Dow up from under 1,000 in August 1982 to over 14,000 twenty-nine years later.

But now the tide as turned. It rushes out between our toes and takes with it our fondest hopes. After expanding during our entire lifetimes, credit is now contracting. And that means more savings...but fewer sales, fewer jobs, and fewer profits. Can working people reasonably expect to earn more money next year? Five years from now? No. Can businesses expect rising sales and profits? No. Will the feds balance the budget, cut taxes, or increase benefits in the years ahead. No. No. No.

The outlook is not rosy. It's grim. As we reported yesterday, household discretionary spending is at a low it hasn't seen in 50 years. A half- century of economic progress wiped out! Real unemployment is closer to 16% than to the official 9% - and it's rising.

Yesterday came a report from August: companies had cut more jobs than expected.

And even economists who are silly enough to believe the stimulus is working still say unemployment will likely remain stubbornly high for years to come.

So let's add this up. Fewer people with jobs. Those who have jobs are paying off debt. Less consumer spending (back-to-school spending was disappointing, say the press reports). So, lower business earnings.

What would make stocks go up under those circumstances?

We also get word that insiders are selling stock heavily...and that consumer bankruptcies are up 24% over a year ago.

New economic boom? Not likely. New boom in the stock market? Not likely either.

But stocks don't stand still. If they can't go up...they will go down.

What will cause a break in the stock market? Who knows? Here's a possibility: The Chinese stock market could crack. Maybe it already has. China is the great hope of the world economy. When it becomes clear that China is a bubble economy...and not a genuine growth economy...Western investors are likely to lose heart. Then...watch out!

Bill Bonner
for The Daily Reckoning Australia

Bear Markets Do Not End With Stocks Still Trading at Nearly 20 Times Earnings, 8.5 out of 10 based on 16 ratings

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