Lessons Learned from 2008-2009’s Market
The single most important thought to take away from the crash of 2008-09 was that you must force yourself to buy when stocks get cheap even if the macro-economic turn is not yet in sight.
The September 25, 2009 edition of Value Line compared many valuation metrics from the last market peak (July 13, 2007) and the recent market bottom (March 9, 2009) to the same valuation measures from Sep. 16, 2009. Here are some of their published numbers…
| Valuation or Yield | Sep. 16, 2009 | 13-wk range | 50-wk range | Last Market Top - 7/13/07 | Last Market Bottom – 3/9/09 |
| Median P/E of all Value Line Stocks | 17.2x | 14.7x-17x | 10.1x-17.2x | 19.7x | 10.3x |
| Median Yield of all VL Stocks | 2.1% | 2.1% - 2.7% | 2.1% - 4.0% | 1.6% | 4.0% |
| Dividend Yield of DJ Industrial Stocks | 2.8% | 2.8% - 3.3% | 2.8% - 4.0% | 2.2% | 4.0% |
| CBOE Put Volume/Call Volume | 0.78 | 0.74 – 0.99 | 0.72 – 1.26 | 0.91 | 0.93 |
| 91-day T-bill rate | 0.2% | 0.1% - 0.2% | 0.00% - 1.5% | 5.0% | 0.3% |
The perceived risk and the actual risk are almost always out of step. In early March this year investors were fleeing (what they felt were risky) equities as about ten times earnings to buy ‘safe’ T-bills yielding 0.3%. Ironically, at that time the average yield on all stocks in the Value Line universe was 4%.
They sold bargain-priced shares with high dividends to park their money in ultra-low yielding T-bills and CDs. They were sitting on the sidelines as the market rebounded over 50%.
At the market peak in 2007 many of these same people were shunning 5% yields to invest in stocks at 19.7x earnings.
We still haven’t seen clear signs of an economic rebound yet the market has shown one of the best six-month gains in the past century.
Sir John Templeton said long ago “If you wait to see the light at the end of the tunnel… you’ve already missed the bottom.”
What should you be doing now?
Almost every metric is at or near its 50-week high multiple and low yield. There are not as many bargains to be had. This is a time for some caution and selectivity. Magazine covers are a contrary indicator and lately major financial publications have been running cover stories on “Is it time to get back in?”
Caveat emptor.
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