August 2015 – FINANCIAL – Don’t be surprised if stock markets stabilize or bounce back in the next couple of days. Markets are due at least a short-term rally after this week’s dramatic plunge. This usually happens after a sell-off, no matter what the next big move is going to be. It doesn’t mean anything. But anyone who automatically assumes this is another easy “buying opportunity” is talking nonsense. For the past couple of years, Wall Street’s perma-bulls have had it their way. They’ve been gloating openly as stocks went up and up and up, seemingly without pause.
It got to the point that those warning about valuations and danger signs had been mocked into silence — or were simply ignored. Not now. I don’t mean to be alarmist or to induce panic, but someone needs to tell the public that there is a plausible scenario in which the U.S. stock market now collapses by another 70% until the Dow Jones Industrial Average falls to about 5,000. The index tumbled more than 3% to 16,460 on Friday. Dow 5,000? Really?
I’m not predicting that will happen, but contrary to what the bulls tell you, it cannot be completely ruled out. And even if that ranks as an outlier and a worst-case scenario, there are other, more likely scenarios where the Dow falls to somewhere between 10,000 and 12,000. In other words, although this might be a buying opportunity, a serious reading of history suggests this week’s sell-off might also be the beginning. Let me say on the record that I am not joining the perma-bears or extreme doom-mongers. I am simply pointing out that the perma-bulls have taken their own arguments way too far. The stock market is not doomed to collapse to oblivion, as some hysterics keep claiming. But it is not certain to keep going up by 10% a year, either. All those claiming that every sell-off is a buying opportunity, and that stocks “always outperform,” are lying to you.
As stock market historian Russell Napier points out in his book “Anatomy of the Bear,” on five occasions in the past 100 years — in 1921, 1932, 1949, 1974 and 1982 — those big downward moves have not ended until share valuations have fallen to just 30% of the replacement cost of company assets. That’s using a powerful, if little-known, economic metric known as Tobin’s q.And, to cut to the chase, if Wall Street stocks followed the same path today that would take the Dow down to about 5,000, and the S&P 500 Index all the way down to around 600. (The S&P 500 slumped more than 3% to 1,971 on Friday.) –Market Watch