After months of a brutal sell-off, the U.S. stock market could be close to finding a bottom as hundreds of billion of dollars in government support work their way through the financial system to quell the credit crisis, money managers say.
While cautious about making such a definitive call, they agree that a stock market recovery albeit a limited one is quite possible before the end of 2008, given that valuations are at historic lows.
A number of things suggest that, if its not the bottom yet, were quite close. If you are looking for a bottom in the market, look at valuations on a historic price/earnings basis relative to other recessions, Jonathan Armitage, New York-based portfolio manager and head of U.S. large-cap equities for Schroders PLC, said in an interview. The firm has $259 billion under management.
In terms of timeline, if you look at financial crises in developed markets over the last 20 years, markets discount the bad news and start to rise sometimes around 12 to 14 months after the start of a financial crisis, Mr. Armitage explained. The credit crisis began 14 months ago, in August 2007.
If you look at periods of economic recessions in the U.S. since World War II, the worst-case scenario was in 1973-74 and the worst (Standard & Poors) decline from peak to trough was 48%, added Mr. Armitage.
The S&P 500 index is hovering below the 900-point level, or about 43% below its all-time high of 1,565.15 set on Oct. 9, 2007 two months into the current credit crisis. The S&P 500s P/E has dropped to about 11, closing in on its average level of nine during prior recessions and a far cry from its long-term average of 17.
Mr. Armitage noted that market cycles are not completely alike. In this latest case, the sell-off reflects the deep extent of the financial crisis as an enormous amount of leverage remains, both on the financial and consumer sides, he said.
Its not unreasonable to see a market bottom between now and the first quarter 2009, Mr. Armitage ventured. But its completely different to say the market is going to start moving way up, which is a much more complex call.
James Paulsen, chief investment strategist at San Francisco-based Wells Capital Management, said markets are trading on pure emotions and momentum, and not much on fundamentals. Wells Capital has $246 billion under management,
We are close enough to previous lows, and we see technical testing of those lows, Mr. Paulsen said. At some point, we are going to reconnect with the fundamentals and, granted, they are worsening. We could see a lot of bad things happening in the economy, but they are already priced. There is a recession already priced in here.
Trading on Wall Street on Oct. 24 seemed to support Mr. Paulsens view, as U.S. equities held comparatively better than their battered peers in Asia and Europe.
People are behaving as if it were the second coming of the Great Depression, he added. We have a complete lack of confidence. This process will have to work its way. If the market is still in the same area a week from now, therell be greater confidence.