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S&P’s chief investment adroit tactician says a bear-market bottom may already be in place—and tells why 2009 could be a better year for stocks

By Sam Stovall From Standard & Poor’s Equity Research

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Excerpted from a common fame published by means of Standard & Poor’session Equity Research Services on Dec. 22

Investors will remember 2008 as a year of change. Not just change in the White House, but furthermore the pocket change that they used to call their portfolios.

Let’s face it. This bear market started for the reason that the perfect tear of popping bubbles—commodities, emerging markets, hedge funds, and real estate. From Oct. 9, 2007 through Nov. 20, 2008, the S&P 500 declined 52%, fabrication it the third-worst bear market since the 1929-32 shiver. One of the more amazing characteristics of this decline was its speed. The average "mega-meltdown," or transport market degeneracy of more than 40%, traditionally took 21 months to play out. This one took 13 months.

Not surprisingly, all 10 sectors within the "500" bloody, from a 22% slump for Consumer Staples to a 74% thrashing for the Financials. Finally, 125 of the 128 subindustries in the S&P 500 declined.

Where do we go from here? Probably not take down, in our opinion. A small in number months ago, I wrote that 700 on the "500" might be a worst-case scenario in spite of a decline, citing the trendline drawn off of the 1932 low, the average bear-market retracement of foregoing bull market advances, and the applying of a bear market P/E ratio on a conservative "top-down" EPS estimate. We got close to that level, as the S&P 500 closed at 752 on Nov. 20. Since then, it rose 21%—technically signaling the start of a newly come speculator on a rise market. So I say why evade the truth? What’s 50 points among friends? Besides, we rely upon in that place are several reasons that a bear-market dale may already be in site.

• The magnitude of the decline is single in kind of the reasons I believe a bear-market moo may have been propose in place. The 52% decline is within earshot of the 54% falloff recorded in the 1937-38 possess market—the second worst since 1929. Only if you believe the 89% decline recorded from 1929-32 will be challenged should you stop reading any further.

• If the year had ended on Nov. 28, when the S&P 500 had recorded a 40% year-to-date decline, it would have been the second-worst calendar year since 1900; 1931 was worse at minus 47%. What’s other thing, the S&P 500 prostrate by greater degree of than 20% eight times since 1900. It rose in six of the subsequent years, posting some average push of 10.4% in all occasions. You have to have an air to 1931 and 1932 for the exceptions.

• This support market retraced 103% of the advance during the 2002-07 bull market. Traditionally, bear markets retrace any average 73% of prior bull-market gains. And those that retrace more than 60% of the prior bull run have taken back an medium 110%. The current 103% retracement is close enough, in my opinion, to call it a wrap.

• At the 752 level, the S&P 500 was trading at a P/E ratio steady trailing operating earnings for participate in (EPS) of 11.5 times, equal to the lowest operating P/E ratio in the 20 years that S&P has been tracking operating results. It is also a 40% discount to the medial sum operating P/E ratio of 19.3 times since 1988. (In prior years, the Street looked only at GAAP or "in the same manner with reported" EPS).

• Finally, on Dec. 8, the S&P 500 closed at 909.70, or 20.9% above the Nov. 20 closing low of 752.44. Technically, that’s a new male mart. Even though I would prefer to see this level successfully retested in the sight of admitting that we are in the beginning of a newly come bull market, history indicates that no other than once since World War II (September 2001-January 2002) did the S&P 500 experience a bear-market ascend in disproportion of 20% that was subsequently followed by an even lower low. All other 20% advances were eventually proven to have been the ultimate bear-market submissive. Again, you have to go back to the 1930s to find exceptions to this rule.

Of behavior, these are unprecedented times and the rules are being rewritten every day. In totality, however, I believe the affluence of positive precedents will that may be liked serve as a healthy dose of indirect Valium.

S&P’s Investment Policy Committee has a yearend 2008 target of 850 for the S&P 500, indicating a full-year projected decline of 42%. Our 2009 mark of 1025, however, anticipates a 20% gain. Why such an optimistic send? Actually, by historical standards, it’session fairly conservatory.

This is the 16th bear market since 1929. Its more-than-50% decline makes it the worst bear since 1945, and the third worst since 1929. But when this bear place of traffic finally ends, history says be prepared for a fast and turbulent partial recovery. In the first 40 days after establishing a bear-market bottom, the S&P 500 has traditionally recovered any average 33% of the point loss experienced during the just-ended waft market. In this predicament, that would point to an initial take courage from the 752 direct on the "500" to around 1020 previous to the market gives us a second chance to get back in. Historically, in the 20 days following the initial bounce off of the bear-market scurvy, the S&P 500 has retested the prior low by falling 7% from the recovery high. An average retest would imply a falling off to the 950 level. Be prepared for an even deeper retest, however, like declines from recovery highs following mega-meltdowns (bear markets of -45%+) have averaged 13%, which would imply 888 on the "500."

Should Nov. 20 extremity up being the feeble for this bear market, we confident 2009 may end up being a fairly good year for blockhead returns, if history is any guide. During the rudimentary year of a new bull market considering 1932, the S&P 500 rose an average 46%. What’s greater degree, the "500" recovered more than 82% of the prior bear market’s loss, on average, in that first year. I can’t guarantee that the market will respond the same way this time around, but successful investors look at account—and history points to a sharp advance in the chief year of a new taurus market.

Original text: http://www.businessweek.com/investor/content/dec2008/pi20081224_461823.htm?campaign_id=rss_null