An interesting point on how investor sentiment has always overshot to the downside.
“Davidson” comments on the following chart”
Here is the SP500 from Dec ’27 to Dec ’49. The P/E and EPS are included. The change in psychology from Sept 1929 to June 1931 was much greater than the $1.60 per share to ~$0.50 per share earnings drop. Psychology has always had an enormous effect on market prices and true Value Investors utilize this knowledge to their advantage. Most available data bases do not go back beyond the 1960’s as the data reliability is not guaranteed.
(This chart is constructed from data extracted from older SP500 sources and likely does not conform to modern accounting standards. The relative perspective is useful just the same.)
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From 1929 to 1931, the S&P Earnings dropped 37% yet the value of the S&P dropped 85%. Simply said this means investors were over twice as pessimistic about US business then what the reality of them actually was.
Another interesting point is the 1931-36 recovery. Note the PE skyrocket up ahead of the market. It is clear investor sentiment turned positive BEFORE the actual earnings of the S&P did. Notice from the chart earnings stays flat until essentially 1934 while the market has a massive rally. So, great you say, what does it all mean?
It means the market bottoms before earnings do and then rallies before they rebound due to sentiment. So, then, where are we now with sentiment? I am using modern numbers because to the best of my knowledge there are no “sentiment” readings from the 1930’s other than market results (if anyone knows that there are, please let educate me).
We are now more negative than the last two recessions (with reason). Those low readings eventually gave way to the 1990’s and 2002-2008 bull markets.
We can go back to a post I did last week regarding cash vs. the S&P. It shows just how pessimistic people are. Money sitting in the bank right now in Treasuries in earning essentially nothing. This, for the majority of people is preferable to the “expected” losses they assume in the market. It also is tremendous fuel for the fire once that sentiment changes and, yes it will. The current situation is not even as bad as 1980-81 much less 1929-31. The US economy and the market both came back from those periods and will again.
Now, the trillion dollar question is “when?” Again, I do not make “bottom” calls but I feel there is a large swath of the market trading at “eventual destruction” valuations. I also know people are of the mindset the world, while not quite ending is racing towards depression. With the ammunition sitting there to buy equities present, when the depression does not occur people will tired rather rapidly of earning nothing on cash in the bank or in US Treasuries and will want a higher return in the market from equities again.
When they do, the floodgates will open..
Disclosure (“none” means no position):
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