Dow below 7000: how bad is this going to get?

In My Humble Opinion
1

In the last few month I have seen my retirement fund almost vanish, and the kids’ college funds are gone in a puff of smoke. But my family is very lucky in that employment is steady and retirement and college are a ways off.

But it seems that every day there is more bad news about employment, stock prices, and bank failures.

I remember an early discussion in which many predicted this downturn would be brief. And there was shock when the Dow went under 10,000.

How bad is this going to get? Does anyone see any hopeful signs of a turn around any time soon?

2

Personally, I just think it is too hard to say. Unlike many economic downturns, this one has some real structural problems that seem to extend beyond the standard macroeconomic business cycle analysis.

I could be wrong, of course, but the system seems broken.

3

We’re all going to die.

4

No, I’ll think we’ll have to wait at least 18 months.

5

Well, just for comparison’s sake, the Dow hit a peak in 1929 at 380.33

After the crash, the market took another three years to find its bottom at 42.84

A similar stumbling fall from our most recent high point would take the Dow down to around 1569

(Don’t know of anyone who’s predicting that, but it is historical precedent worth noting.)

6

There are a lot of indicators that are far from good. For example take a look at this graph. It compares Household Debt to (US) GDP. There are only two points on the graph that pass 100% 1929 and 2007. Obviously any comparison to 1929 is a sign for concern.

Now it is quite possible that within the next year, individuals and countries take sufficent corrective measures that everyone regains confidence that the fundamental issues are being resolved and everything perks up. But there are real true and serious issues that will need to be addressed. We may very well be in for a multi-year recession/depression/panic. And there may be nothing anyone can do to prevent that.

7

Back at the start of the Reagan Revolution the DJIA was at about 750.
Newt’s 1994 contract with America saw the Dow at 3800.

8

Current U.S. equity option pricing seems to indicate that the market won’t start to trend upward until mid-late 2010.

That being said, don’t confuce the Dow levels with being an indicator for economic activity. The Dow hitting 5,000 (and I’m not saying it will) doesn’t mean anything in terms of unemployment, wage growth, etc.

Positive or negative.

9

I remember I made one of the biggest gaffes in the SDMB when I confused the Dow with the NYSE, I posted in a thread on “how low it can go?” that we had hit 5000.

The next poster told me how wrong I was and made a joke asking if I was from the future…
I should had said: …“maybe”. :frowning:

10

Nobody knows. The economic outlook isn’t necessarily a good indicator either. Though the economy was very bad in the 1930s there were several years when the market went up 30% or more.

If the market is deeply oversold relative to the economy the economy doesn’t have to get better to move the market up. The market just has to reflect the economy. IMO, we are deeply oversold.

The problem is that these trends can perpetuate themselves quite some time. I thought oil was overpriced and needed to correct when it broke through 80. I guess I was right, but it really didn’t matter. It kept going up to 150 before it corrected.

Similarly I find fair value on the market somewhere around 10,700 pessimistically and 12,850 optimistically, depending on when we see an economic turnaround.

We are off the pages in terms of what can be justified by fundamental analysis. Stocks are trading beneath liquidation levels in many instances. We are kind of in the grip of behavioral finance.

Charlie Munger (Warren Buffet’s smarter partner) tells a story which is germaine:

If you live in a village and every day you walk along a path to get water, and your parents walked that path, and their parents, and everyone else in the village does and has done so, then you are probably pretty comfortable walking that path.

If there is a huge boulder poised above that path you are probably very comfortable walking underneath it, simply because it has always been there and never fallen.

But, if the boulder should fall and crush a few people chances are that after that everybody in the village will walk the path with their eyes to the sky looking for falling boulders.

In reality, since the boulder has already fallen and is lying on the ground, the chances of it falling again are nil.

Similarly as stock prices drop, they trade closer and closer to a valuation which is just to good to be true (below liquidation or breakup levels, below earnings, whatever measure you care to use.) As stocks approach those levels it is harder for them to drop further. There is just less fluff in their prices. So, the boulder has essentially fallen.

Like the villagers though, we still have our eyes on the sky. What we should really be doing is thinking about the next major disaster, not the one that just happened. One possible consequence of all the spending the government is doing to fix the current problem is severe inflation.

Right now people are so afraid of stocks they are running to treasuries and CDs and other perceied “safe” investments and bidding them to extreme levels. Those are the boulders that are very high right now and in danger of falling.

11

This seems to be a bit closer to a poll, (or even a General Question) than a flat out debate, so I’m going to nudge it over to IMHO.

12

I’m close to being willing to bet that this is the case (see my other thread on buying stocks :-P).

I could be wrong, but right now I’d predict:
1.) It will get a little worse before it gets better
2.) The dow will be up at least 10% in two years.
I could be entirely wrong, but I hope for the country’s sake that I’m not too far off on number 2.

13

Liquidation levels might be lower than you’d think in this market.

14

Can’t really guess on the DOW but the banking problem hasn’t hit the fan yet. I could see it in the low 5,000 range when it bottoms.

I’ve heard unemployment estimates in the 10 to 12% range.

15

There was a thread back in the fall about whether the Dow would go below 10000 before inaugaration. I knew then that 10000 was going to be busted in no time. IIRC, I predicted that it would bottom around 3000. I consider that optimistic now. You really can’t judge a company’s actual asset value now since there are so many layers and shenanigans going on.

There are hundreds of trillions of dollars of purely paper “assets” kept on the books on Wall Street that need to be written off ASAP. Unfortunately, the new administration (like the last two) is too chummy with the very people who caused this to actually go after them and get things resolved. Once the people start revolting against bailing out the execs, things will crash quickly.

There will be no long term turnaround for years.

16

In the morning paper was an article about what the technical definition of a depression is and at what point we slip from a recession to a depression.

This makes me nervous.

17

I have a friend who trades daily and he claims that “the smart people are telling me that it will end between 2 and 3K”. He has also been predicting the DOW would hit 6K since I’ve known him - about 8 years. Now that it is coming close, he is feeling vindicated. I on the other hand think that if you predict rain long enough, eventually it will rain and you’ll be right.

To answer your question: I don’t think anyone could really say. The Feds have a program that predicts the end of the recession by mid 2009. link Does that mean the DOW will start to return? I don’t know. But I hope that their prediction is right.

18

I don’t see any hope for a turnaround any time soon. The economic crisis has already destroyed the economies of four countries: Iceland, Greece, Ireland, and Estonia. There is ample reason to believe that other, larger countries will collapse in the months ahead. Because of globalization, economies from around the world are interrelated; failure in one country can have severe consequences in other. There’s an information shortage. Nobody really knows what’s happening in every other country on the planet. This leads to mounting uncertainty. Another major downfall could occur at any moment, in a place that no one is even paying attention to. In the face of such uncertainty, people hoard their money. They don’t spend and they don’t buy stocks.

Even if we accept the questionable logic behind the bailout, the fact remains that we can’t bailout the entire planet. Nobody can. There simply isn’t enough money on the planet to fix all of the problems that are popping up.

19

This is where I start to struggle. Money is an entirely artificial concept - it’s just a token for work. The whole world can’t be in financial trouble, as there’s no “outside” for us to owe money too.

So to fix global problems, surely lack of money isn’t a problem. Money can be created. What is needed is work, right?

20

When the lead photo on AP is one of a Wallstreet broker collapsed and burying his head in his hands, as it was for me this morning, you know things are really bad.