Bear or Bull: Has the Stock Market Bottomed Out?

Over the past few weeks, I have spent time discussing various issues in the economy, from the $700 billion bailout plan to presidential fiscal policies. In the end, no matter what any analyst or I think of these issues, the ultimate judgment is made by the stock market. It is the number one indicator for the health of the economy, and over the past year the S&P 500 has declined ­­­34 percent, making it one of the worst bear markets yet (see below, left). The thing that makes this market so odd is not the fact that it has been declining; many people anticipated the burst of this current bubble. It is how volatile and unpredictable this market has been that makes it so odd. Drops of hundreds of points one day are followed by gains of hundreds of points the next. Negative economic news makes the market rise, positive news makes it drop. Recently, however, the market has been especially unpredictable. October was the worst month in 21 years, but the last month of October marked the largest weekly gains the market has seen in 34 years (see below, right). Does this indicate the market has bottomed out, or is it just another example of the market’s odd and irrational volatility? With this question in mind, I decided to explore the blogosphere and see what others believed. Like before, I found two blogs that had especially interesting discussions about the topic and left my feedback on them. In the first blog, The Big Picture, Barry Ritholtz discusses other predictions for the bottom in an entry titled “Race to Call the Bottom.” He does not try to predict the end of the bear market but instead talks about the absurdity of some of the predictions out there as well as how unlikely it is for someone to be able to know the market well enough to predict when it is going to bottom. In his blog on the website Seeking Alpha, Ian Cooper tries to address the issue in an entry entitled, “The Economy’s Worst is Still Ahead of Us.” He believes the worst of the crisis is ahead of us, and quotes Nouriel Roubini, a New York University professor, in order to back his point. Roubini was one of the few who has predicted this financial crisis for years and, according to Cooper, has emerged as a leading commentator on the crisis. For your convenience, in addition to posting my comments on each respective blog, I have copied them below.

“Race to Call the Bottom”
Comment:
Thank you for your article about the absurdity of trying to predict a bottom of the market and how every media outlet is searching for “experts” to give them a number the market is going to bottom out at. The entire concept that a person is able to accurately predict a number at which the stock market will bottom out, even within 100 points, is asinine. There are so many factors that control and direct the stock market. Some are measureable, others are not. I can understand how analysts arrive at their estimates and their importance to investors, but in the end, they are only estimates. For a news outlet to take those numbers and quote them as if they are an assertion of fact by that analyst is just irresponsible. I especially liked your example of Peter Boockvar being quoted in the New York Times as believing the Dow would bottom at 5,000, despite the fact that he had really only come up with a range of 5,000 to 7,000 in which he could see the market reaching its bottom. His quote is especially meaningful, when he says, “No one’s smart enough to answer the question as to where we’ll be a year from now. I think it’s silly to pick a number.” Is this fact such a difficult concept to grasp? As you say yourself, “The track record of economists and strategists is notoriously poor, no one ever consistently gets the year out forecasts correct several years in a row – it’s just totally random.” Do reporters and analysts actually believe that they are going to be correct when they throw out these seemingly arbitrary numbers of where the market will bottom, or are they only creating these numbers for others to read so that they can get some publicity or sell copies of their articles?

All in all, thank you again for this commentary on the folly of market forecasts, especially the narrow forecasts we have been seeing lately. In the future, I would love to see more discussion of the extreme forecasts you mention earlier in your article or a continued discussion of other forecasts for this particular market. Really, all an analyst can do is give a broad range of numbers he or she believes the market will drop to or give an opinion as to whether the current market is at its bottom at the time. I believe these specific forecasts to oftentimes be little more than publicity tools, yet people will continue to look upon them as fact until more people like you come out and call them out for what they are: overly speculative educated guesses.

“The Economy’s Worst is Still Ahead of Us”
Comment:
Thank you for your interesting piece about how the market has not reached its bottom. It is interesting to see how often Wall Street is dominated by a group think mentality. I feel that all it takes for a temporary spike in the stock market is for a handful of analysts to come out with a positive outlook on the market and everyone else will buy into it. Are these people not supposed to be some of the brightest in the country? Are they incapable of looking at some of these facts and realizing that, although we do not know exactly when the market is going to turn around, it probably is not at this exact moment? Looking at the past week, it is shocking to see how irrational the market has been. Consumer confidence fell to an all time low (almost 15 points below the Street’s estimate) and yet the market rallied nearly 900 points. Additionally, the United States GDP declined for the first time since 9/11 and real consumer spending fell for the first time since 1991, and the most since 1980. I am not sure which part of this news indicates to investors that the market has bottomed out.

If what you and Roubini say is true, and that hundreds of hedge funds will go belly up and the Option ARM loans result in a second financial crisis, those optimists are in for a rude awakening. On that note, I wish you had gone into greater detail about why the hedge funds are going to fail or when the Option ARM loans are going to begin resetting. The prediction that the hedge funds will go belly up loses some of its credence when you do not back it with any reasoning, only repercussions. You explained the Option ARM loans well, but by not including an idea of when to expect that crisis to begin, all you did is raise my blood pressure. However, those two do not take away from the fact that this was an eye opening piece about where the market has the potential to go. I am hoping none of your predictions come true, but look forward to continuing reading your blog in the future.