At the height of the 1990s bull market, the price of stocks in the Standard & Poor's 500 stock index rose to more than 30 times company profits, a record level that was more than twice the historical average. Between March 2000 and October 2002, the S&P 500 fell 49%, but its price-to-earnings ratio never fell to the historical average of 15 or 16.
To some market analysts, that meant stock values were still too high and investors were still too optimistic. During periods of stock-market weakness, price-to-earnings ratios eventually fall below their averages, sometimes into the high single digits, as they did during the last long-running bear market.
At Thursday's close, the price-to-earnings ratio of the S&P 500 was down to 10.7, the lowest since the early 1980s.
At the time of the "great depression," most stocks lost most of their value between 1929 and 1932, and it took 10 years for any serious rise. Today, there is hope that economists have learned someting since the great depression. Ben Bernanke did his research at Princeton on the Depression, for example. But all this hope is speculative and economy leaders like Henry Paulson are all engaged in a massive experiment.
Now, Moody is suggesting that Goldman Sachs and Morgan Stanley, may have their credit rating drop. Yesterday, when short selling was re-opened, their stocks dropped dramatically.
Update:
Chris Bowers commented on this blog from The New York Times,
With today's plunge in the stock market, the Standard & Poor's 500-stock index has now fallen 42 percent over the last year. Just how bad is that?
It's nearly as bad as one terrible 12-month period from late 1973 to late 1974. Other than that, it's the worst decline since 1932.
These historical comparisons are best done in real - that is, inflation-adjusted - terms, so that's what we will use from here. In real terms, the decline since Oct. 9, 2007, has been about 45 percent. From the end of September 1973 to the end of September 1974, the S.&P. 500 dropped 48 percent.(...)
The worst 12-month period happened between June 1931 and June 1932, when the stocks fell 62 percent. (Mr. Shiller's data is monthly, so there was probably a 365-day period that was slightly worse than this.)
Bowers added, "Given that this was published yesterday, we have probably blown past 1973-1974, trailing only 1931-1932. And there is reason to believe that it will continue to fall."
In just a few days, even by the end of next week the market could easily drop another 2000-2500 points from where it is now, hovering just above 8000. That would make this crisis WORSE than the 1929 depression.
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