How Low Can This Market Go?

Despite the recent rebound, the S&P 500 still sits a good 20% off its 52-week high. Many other global markets have fared far worse, particularly the Chinese market. Across the pond in the U.K., the FTSE 100 has been no exception. On July 7, advisor Maynard Patton from our Fool U.K. sister site (fool.co.uk), provided an interesting take on the FTSE's future value. We thought you'd like to read it. The article has been updated and Americanized by Todd Wenning.

So this market has tanked once again. But just how low can it go? The brutal bear phase of 2000-2003 may provide a clue.

Back in March 2003, the FTSE 100 finally slumped to 3,287 after almost touching 7,000 little more than three years earlier. Such was the despondency as the final seller cleared out; the dividend yield on the benchmark index reached 4.12%, exceeding the 4% then available from gilts [U.K. government bonds] and leading deposit accounts. The 4.12% yield was also well ahead of a 3.75% base rate and a three-month LIBOR rate of 3.66%.

For what I reckon was the first time in about 40 years, investors effectively believed company dividends would never again grow as fast as cash. It proved to be a wonderful share-buying opportunity.

Fast forward to now: The FTSE 100 index -- at 5,413 -- sports a 4.3% income, while gilts offer around 5%, deposit accounts pay 6%-plus, three-month LIBOR is about 5.9%, and the base rate is 5%. If this market were to bottom out with a 5% yield in line with gilts and the base rate, we're looking at FTSE 4,698 and a potential downside of 13%.

But I'm not sure why anyone looking for a "safe haven" would buy gilts now at 5%, when 6% can be obtained in a savings account. Assume the nadir will be reached when blue-chip yields have risen to match cash and we're looking at FTSE 3,915 -- or a potential downside of 28%!

So what now?

Well I'm generally quite bullish on shares and I do think obvious bargains have already appeared in the market's lower reaches.

I'll leave you with this list of top-rated U.K.-based stocks, according to Motley Fool CAPS:

Company

CAPS Rating

Rio Tinto (NYSE: RTP  )

*****

Diageo (NYSE: DEO  )

*****

BP (NYSE: BP  )

****

GlaxoSmithKline (NYSE: GSK  )

****

Vodafone (NYSE: VOD  )

****

AstraZeneca (NYSE: AZN  )

****

Unilever (NYSE: UL  )

****

*Source: Motley Fool CAPS, as of July 17, 2008.

Unilever, GlaxoSmithKline, and Diageo are Motley Fool Income Investor recommendations. Try any of our Foolish newsletters today, free for 30 days.

Todd Wenning gets his tan from standing in the English rain. He does not own shares of any company mentioned. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy rules the waves.


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