Was That the Market Hitting Bottom?

Did someone, for the first time in Wall Street history, ring a bell signifying that the market had finally hit a bottom?

I don't think so. … And if they did, no one was kind enough to let me know on March 6 that we had reached the market's nadir with an ominous intraday low of 666.79.

The only noises I was hearing that day were the sounds of spirits being crushed and the sound of hot air rapidly escaping the cavernous bellies of investment managers everywhere.

Sounds like a whoopee cushion
Someone should have rung that bell, because we could've made the easiest 20% of our lives!

Yet here we are today, up nearly 150 points from that low, with an interesting question in front of us: Where will the market go from here? Will it continue to regain some of the past six months' epic losses? Or will it revert back to or below the lows we've just hit?

Regardless of what you think will happen, the market is quickly making up its mind without you.

As we speak, the market is too busy reacting to a mixture of positive and unexpected economic news to remember the horrors of just a few weeks ago. Is it the sound of Ben Bernanke warming up his printing press in Washington that has investors so jolly? Could be. Is it the details of Timothy Geithner's toxic-asset plan that are bringing confidence back into the market? Perhaps.

Either way, the market has reacted and that is what's important. The bull is back.

Right?

Who knows?
The truth is that there's no real way to predict what's going to happen from here -- despite the grand certainty embedded in all of that intelligent analysis.

Talk to a member of the Austrian school and he's probably loading up on food and ammunition right now. Discuss the subject with a Keynesian economist and you'll likely walk away with a smile on your face. Talk to any reasonably knowledgeable individual on the subject and they probably have a few good reasons why their thinking is the right thinking.

But who really knows?

This combination of events and conditions is entirely unprecedented -- which means no amount of historical analysis will provide a foolproof answer. Experts on the Great Depression may know how to solve the problems of the Great Depression, but this isn't the Great Depression.

And thus, whatever happens in the market (like this 20% bump), should be taken with a serious grain of salt. No one really knows what is going to happen.

So, what do we know?
What we do know is that by all reasonable measures, the market is cheap right now. It's so cheap that businesses of all types (including very high-quality ones) are selling at once-in-a-generation prices.

Even though I'm not particularly confident in the recovery procedures our government is touting these days, I think the odds of success in the stock market going forward are strongly in our favor -- for the first time, in a long time.

Companies like Walt Disney (NYSE: DIS  ) , Microsoft (Nasdaq: MSFT  ) , and Apple (Nasdaq: AAPL  ) -- high-quality businesses all -- are selling for so cheap that you just have to buy. Truth be told, I'm a recent owner of all three.

And they aren't the only ones:

 

P/E

5-Year Average P/E

ExxonMobil (NYSE: XOM  )

8.1

11.3

Cisco (Nasdaq: CSCO  )

13.2

21.6

Johnson & Johnson (NYSE: JNJ  )

11.6

17.8

FedEx (NYSE: FDX  )

13.2

18.7

Data from Morningstar.

There is too much quality here, trading for too little, for you to stay out of the market.

Mr. Jeremy "Wizard of Wharton" Siegel apparently agrees, saying in a recent interview: "You are now investing when stocks are down 50% from their peak. ... Once you're down 50% from the peak there are almost no bad outcomes going ahead 10 years."

Now, I wouldn't go as far as saying that there's no chance of a bad outcome. (Remember, we've never been in this situation before!) But the odds of a good outcome are significantly higher than they were, say, 18 months ago.

The odds are with you
Back in the days when stocks actually went up, there was considerable real risk plugged into the market. Growth assumptions were too generous, prices were too high, and -- most important -- very few people knew about the dangers of what was happening in the real estate and financial industries.

But since then, the market has been sliced in half, assumptions have been reduced, book values have been adjusted and a lot of scary information has been brought to light. Whether there's more bad news to come is unclear (credit cards? commercial real estate?), but though it may seem scarier to invest today than it did in 2006 (thanks to a media with a penchant for the sensational), mathematically speaking, it's simply not.

The Foolish bottom line
What we need to do here is simple.

There may be more bad news left to come; so hedge your bets. Concentrate on the companies that are historically very cheap, but still provide sufficient downside protection, in case we're all way off base.

That means pursuing companies with strong balance sheets, good cash reserves, and products and services that are not likely to go away tomorrow. You can have the best of both worlds that way.

If you like the idea of having bets stacked in your favor (plenty of upside, limited downside), then it's in your interest to find the types of companies I mentioned above. Where can you find them? The Motley Fool's Inside Value service is one spot: Philip Durell and Ron Gross have identified 5 Best Buys Now based on the best risk-adjusted values and 5 Best Buys Now based on pure upside potential.

Click here to take a free trial to the service today -- and enjoy all top 10 picks immediately.

Fool Nick Kapur is an Austro-Keynesian economist and owns shares of Disney, Microsoft, and Apple. Johnson & Johnson is a Motley Fool Income Investor recommendation. Apple, FedEx, and Disney are Stock Advisor recommendations. Microsoft is an Inside Value recommendation. The Fool has a disclosure policy.


Read/Post Comments (13) | Recommend This Article (62)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 26, 2009, at 4:31 PM, IIcx wrote:

    No one on the Street has ever been in a situation like this. No news is a safe play?

  • Report this Comment On March 26, 2009, at 4:46 PM, MenaJoey wrote:

    Great Article..........

  • Report this Comment On March 26, 2009, at 4:48 PM, FinancialFellow wrote:

    I think that's a valid point: That stocks are still at a good price since they are still down 50% from their peak. Sure, maybe hindsight will reveal that you missed the bottom by a little bit if you buy now as opposed to 3 weeks ago but, the potential upside could still be pretty darn good. Don't get upset if you miss out on a 50% gain such that it prevents you from getting a 35% gain. (Hypothetical rate of return but you get the point.)

    As for whether or not we've already seen the bottom I echo the author's comment "Who knows." I suspect we'll go up a bit more then see-saw for several months before we get a long sustained bull market. If you decide to plow more money into stocks at this point be sure to give some consideration before borrowing money to do so: http://financialfellow.com/2009/03/26/5-things-i-hate-about-...

  • Report this Comment On March 26, 2009, at 5:26 PM, Forrest47 wrote:

    This is just a short bull again. The bottom is still below 5000! You can not have the government spending like drunken sailors to get out of debt and expect it will solve the finacial issues! hold on to your hat come time to pay the piper!

  • Report this Comment On March 26, 2009, at 5:37 PM, jesse2159 wrote:

    Banks still have about $1.8 TRILLION in bad debts on their books and if will take years to unwind. Most of it will be discounted by billions before they dump the garbage. Remember, every recession has two false rally's before getting legs.

  • Report this Comment On March 26, 2009, at 5:57 PM, FinancialFellow wrote:

    Amen to the government spending like drunken sailors comment, Forrest47.

  • Report this Comment On March 26, 2009, at 6:17 PM, twholman wrote:

    I agree wholeheartedly that in the long run (say ten years down the road) you will thank yourself for investing right now. The rest of this year is going to be potentially nasty, but in the spirit of true a true Fool, we should be investing for the long run anyways....

  • Report this Comment On March 26, 2009, at 6:20 PM, MillenniumKnight wrote:

    After reading the fool here I re-entered the market on March 9, buying shares of GE at 7 and VFINX at 62.65. I was pleasantly surprised when I moved completely back to cash on 3/23 and 3/24, unloading my GE at 10.70 and my VFINX at 79.80. I grew my total holdings by 28.8 percent in 2 weeks, gaining 51.3 percent on my GE trades and a 19.5 percent return on the VFINX. I was lucky on these trades. I had moved to cash in November, but now have an interest in riding some of these quick jumps. I am betting on this being a bear rally, and have set buys on DOW at 6.9 and GE at 6.9. I will be in cash until the market drops again so that I can pick up some bargains. I really like the community here and look forward to the great knowledge that everyone shares so openly.

  • Report this Comment On March 26, 2009, at 8:00 PM, chandangle wrote:

    Doug Kass who writes for The Street.com called the "bottom" exactly.

  • Report this Comment On March 26, 2009, at 8:31 PM, CAPTAINWACK wrote:

    It should be interesting when the DJIA hits that 8k mark. As for now we are just riding the roller coaster on an up swing...nothing more. Still tons of laid off people who can't invest because they don't have the funds but if this recession continues for much longer these same unemployed will be selling and taking what money they have in the market and spending it on basic needs. Thus driving the market back down.

    Another point is the fiasco over the AIG bonuses. This has drawn the media's attention away from important issues like GM's deadline on the 31st. Looks like everybody has forgot about that little billion dollar bailout plan that's due. The appointed federal government Liddy boy is playing the game for the feds.

    Let's see.... to divert attention away from GM and the plunging market, let's have Liddy move the AIG Financial Products bonuses up by three months and then unleash the media on those people. Great diversion tactic. The tail wags the dog.

  • Report this Comment On March 27, 2009, at 3:21 AM, rajeevsingh111 wrote:

    Forecasting market movement is not easy even for experts in the feild.. there have been lot of experts who have burnt their fingers trying to rpedict the market bottom. While its difficult to do bottom fishing in stocks , it is easy to pick up stocks of great companies at fair value. And after Oct lows most of the stocks have been trading at historic lows.. This is the itme for some serious buying for people who want to build a quality portfolio for long term. Go out and see stocks which are 50-60% of their highs...

    As Warren Buffetts says, buy when others are fearfula dn sell when others are greedy.

  • Report this Comment On March 27, 2009, at 10:39 AM, sony110 wrote:

    At some point the Dow might reach 8500-9000... but dont get to happy! new lows will be seen by 2012 the latest... invest safe and dont be greedy my friends...

  • Report this Comment On March 27, 2009, at 1:50 PM, belzerlfool wrote:

    My dog can make money in this market . I am 100% invested as of last month and am having a ball watching the results . Gee , I feel so smart . (first time in my life )

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