March 14, 2001
How could stocks not fall further? As fast as stock prices are plummeting, earnings are falling faster. The Nasdaq-100 had a price-to-earnings of 968 this morning -- that means it would take 968 years for these stocks to make back their share prices. Or take the S&P; -- please! Even after their recent decline, the S&P; stocks sold for 24 times the profits they made in the previous year, far above their historical average of 14 times earnings. Just bringing the S&P;'s price-to-earnings ratio back to "normal" would result in the index falling another 40 percent.
Yet still, the bulls are saying that today is IT -- this is the final sell-off before the "V-shape" recovery. Stop kidding yourself, folks.
The truth is, the stock market is only as good as the economy, and the economy is in terrible shape. Retail sales fell by 0.2% in February when economists were hoping for an increase. Business inventories rose in January, which means manufacturers are stuck with warehouses full of products they can't sell. And high-tech, high-paying jobs are being eliminated by the thousands, which shreds consumer confidence, which hammers both the larger economy and stocks.
It's a vicious cycle with no end in sight. We don't want to predict how low the markets will go. But it's a lot lower, and a lot more painful, than any of the bulls want to admit.
® 2001 Weiss Incorporated
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