SP 500 Earnings Update and One Reflection on September, 2008

With next weekend being the anniversary of the Lehman bankruptcy, this coming week the financial media will likely be flooded with stories, recollections, “the wisdom of hindsight” type of reflection (and it’s starting already), that is helpful in not repeating past mistakes, but may not help very much in the current market.

Think about this – the two sectors that led the 1982 to 2000 bull market in US stocks, were the Technology sector and the Financial sector.

The decade of 2000 through 2009 saw two brutal bear markets in guess which two sectors ? Technology and Financials.

Throw housing (primary catalyst to Financial crisis of 2008) and then Energy into the bear market mix, and readers that have been around a while have now seen a significant chunk of the SP 500’s market cap suffer substantial bear markets in the last 18 years. In fact if you think of 2008 and the fact that it impacted the consumer in the way it did, the 2008 Crisis was a far more broad and encompassing bear market (and recession) than anything seen since the 1930’s.

Does that mean it can’t happen again ? Absolutely not.

A recession will occur again – I tell clients to count on it – but it will – in all probability – be very different than 2008.

Having read just about every book I could get my hands on regarding 2008 and the series of events that led up to it, the one stunning admission that most American’s and most retail investors don’t realize, came from President Obama’s Treasury Secretary, Tim Geithner, and his post-Financial Crisis tome, “Stress Test”. Tim noted in the book – and it was a good read in my opinion – that when a US recession starts, “the Fed starts checking boxes”.

Basically, the Fed (FOMC) starts with monetary policy and then sees how the capital markets react and goes from there.

In the late 1990’s, early 2000’s I had some very minor surgery done but it needed to be done by a surgeon at a local hospital, and while chatting during the procedure, he got around to asking me what I did for a living, etc. etc. and I told him.

The surgeon’s¬†question to me was “When Greenspan dies are they going to prop him up in the corner and not tell the American public ?”

Me: (laughing) “Doubtful, why ?”

Dr: “Well doesn’t Greenspan run the US economy ?”

Me: (silently) Uh oh…(Like the man behind the green curtain in “The Wizard of Oz” many Americans probably think there is some FedHead, politician, magician, pressing buttons and turning wheels to keep the US economy humming.)

The Fed and the FOMC don’t predict: they respond. The US economy is its own $20 trillion animal, and every American waking up every day making decisions in their own best interest is the US economy.

Ben Bernanke will probably go down in the annals of Fed history as one of the best Fed Chairman ever, and he and Treasury Secretary Hank Paulson were late to recognize the severity of what was happening in 2008 but once they grasped the full weight of the problem, the further full weight of the US Treasury, Federal Reserve and US government were brought to bear on the issue.

As Mr. Buffett noted in his interview with the Wall Street Journal recently, reflecting on 2008, fear is a contagion, and he noted “US companies were lined up next to each other like dominos” and presumably he meant banks and financial institutions.

Basically, the Fed, the Treasury and the US Government backstopped the US economy. And it wasn’t easy, or maybe even necessary.

It’s very hard to think that re-occurs again, certainly in my lifetime, (I’ll be long dead before that is seen again) and I tell my client’s kids, “you probably won’t see anything that bad again either.”

But there will be recessions and bear markets, that’s for sure.

In hindsight, I’d say that 2008 was the Baby Boomer’s condensed version of the Great Depression, but with a wiser Fed and Treasury, and unlike the Fed of the 1930’s, the Bernanke Fed didn’t repeat the errors of the 1930’s.

SP 500 Earnings data (by the numbers): 

  • Fwd 4-qtr est: $169.09 vs last week’s $169.12
  • PE ratio: 17x
  • PEG ratio: 0.76x
  • SP 500 earnings yield: 5.89% vs last week’s 5.83%
  • Year-over-year growth of fwd est: +22.48% vs last week’s +22.39%

The SP 500 earnings data still looks Ok, but remember as has been written on this blog plenty of times before today, the “forward 4-quarter estimate” didn’t peak in 2008 until July 23rd or so. Because the 2008 recession and Financial Crisis was a rotting from within, I do think Street analysts were slow to recognize the severity of what was happening in 2008, as did the Fed.

We hear from Oracle (ORCL) this week, as well as Costco (COST) and Micron (MU) in the next few weeks.

Oracle is “old tech” and an Original Gangster (1990’s growth giant) struggling to make a Cloud transition and it hasn’t been easy.

Thanks for reading…


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