Worst Year Ever for Stocks: ‘Irrational Exuberance’ of 1990s Being Unwound
Any way you slice it, the 2008 is shaping up to annus horribilis for the U.S. stock market. Heading into Friday’s session, in which an early rally effort quickly faded, the S&P was down 49% year-to-date and on track for its worst year ever. Down 43% year to date, the Dow is heading for its second worst year in history, the WSJ reports, trailing only the 53% decline in 1931.
While the major averages tell a grim tale, the action in components of the S&P 500 speak to the extent of the devastation. Heading into Friday’s session:
* 115 S&P stocks were trading under $10 * 41 were trading under $5 * 204 were trading with a market cap of less than $4 billion
These are not the only criteria used for inclusion in the index, but S&P 500 companies typically have market caps above $4 billion and stock prices above $5. Furthermore, many institutional fund managers are prohibited from owning stocks that trade below $10 or $5, depending on the firm.
In other words, a lot of companies currently in the S&P 500 may not be eligible for membership or, more importantly, ownership by major institutions. That, in turns, may mean more selling ahead, even though stocks are “cheap” based on a variety of metrics. For example, 163 stocks in the S&P 500 are trading below book value, or assets minus liabilities, including non-financials like Alcoa and Duke Energy.
One way to look at what’s happened this year is the stock market is going back to what used to constitute “normal” valuations before the go-go 1990s.
Of course, “cheap” stocks can get cheaper and if we’re really going to wiped out that age of excess, I’ll point out the Dow was around 6400 in December 1996, when Alan Greenspan made his infamous “irrational exuberance” comment.
The real tragedy is that’s about the only thing Greenspan ever got right. Unfortunately, “the Maestro” not only didn’t do anything to prevent future “exuberance” after that speech, but quite a lot to encourage it.
Worst Year Ever for Stocks: ‘Irrational Exuberance’ of 1990s Being Unwound
ReplyDeleteAny way you slice it, the 2008 is shaping up to annus horribilis for the U.S. stock market. Heading into Friday’s session, in which an early rally effort quickly faded, the S&P was down 49% year-to-date and on track for its worst year ever. Down 43% year to date, the Dow is heading for its second worst year in history, the WSJ reports, trailing only the 53% decline in 1931.
While the major averages tell a grim tale, the action in components of the S&P 500 speak to the extent of the devastation. Heading into Friday’s session:
* 115 S&P stocks were trading under $10
* 41 were trading under $5
* 204 were trading with a market cap of less than $4 billion
These are not the only criteria used for inclusion in the index, but S&P 500 companies typically have market caps above $4 billion and stock prices above $5. Furthermore, many institutional fund managers are prohibited from owning stocks that trade below $10 or $5, depending on the firm.
In other words, a lot of companies currently in the S&P 500 may not be eligible for membership or, more importantly, ownership by major institutions. That, in turns, may mean more selling ahead, even though stocks are “cheap” based on a variety of metrics. For example, 163 stocks in the S&P 500 are trading below book value, or assets minus liabilities, including non-financials like Alcoa and Duke Energy.
One way to look at what’s happened this year is the stock market is going back to what used to constitute “normal” valuations before the go-go 1990s.
Of course, “cheap” stocks can get cheaper and if we’re really going to wiped out that age of excess, I’ll point out the Dow was around 6400 in December 1996, when Alan Greenspan made his infamous “irrational exuberance” comment.
The real tragedy is that’s about the only thing Greenspan ever got right. Unfortunately, “the Maestro” not only didn’t do anything to prevent future “exuberance” after that speech, but quite a lot to encourage it.