OK, we know we're in the midst of an unprecedented financial crisis. We know that consumers are cutting back, and that the economy is shedding jobs. Almost everyone has lost a decent chunk of change in the stock market, but one question still hasn't been answered: Has the market reached a bottom yet?
While we'd all like to believe we've seen the worst in red ink, there are some indicators that the market hasn't quite found its footing. Indeed, we may see a few more drops before it stabilizes.
Stormy economic forecast
The biggest obstacle that the stock market faces right now is economic uncertainty. No one knows whether this downturn will be short and shallow, as in 2001, or deep and prolonged, as it was in the early 1980s. Right now, it's looking more like this will be a deeper, more painful cut into our economy.
The most recent Labor Department report shows our national unemployment rate rising to 8.5% -- the highest it's been since 1983. General Motors, struggling to win government approval for its plan to return to profitability, recently announced its intention to cut more than 10,000 positions from its global workforce. GM is in good company, with Corning
On other fronts, the ISM March manufacturing index remains mired at levels indicative of economic contraction, and the service sector has fared little better. The services index, which accounts for roughly 80% of U.S. economic activity, fell unexpectedly in March, contracting for the sixth straight month.
Consumer spending has fallen off a cliff as worried families retrench and prepare for the worst. The sad truth is that the economy may get worse before it gets better. The market has already priced in at least a mild recession; but if the economic data continues to disappoint, we could see new lows for stocks.
If S&P 500 earnings fall to $60, as NYU professor Nouriel Roubini expects they will, and the S&P's price-to-earnings ratio falls to 10, the index could easily trade at 600. That's about 25% below today's prices.
Volatility is king
Another indication that the market is not showing any sign of settling down soon is the incredible level of volatility we've encountered in recent months. The market's Jekyll-and-Hyde trajectory has left investors breathless, with 700- and 900-point drops and gains in a single session.
Individual stocks have been buffeted, too, with names like Alcoa
While the CBOE Volatility Index -- aka the Wall Street fear gauge -- is down significantly from November, it's still pretty much off the charts. Historically high levels of volatility are a good indication that we haven't worked the panic out of the market just yet, and that further declines may be in the works.
The bright side
So is there any good news in this giant mess? Well, our economy undoubtedly faces an uphill climb in 2009. But we've learned at least one lesson from history: The stock market typically heads north long before we have solid evidence that the economy is improving. That means the rebound will likely begin while things still look dark -- and that no one will be able to precisely call where the market will bottom. Investors who are waiting for some kind of economic signal are likely to miss out. The only way to be sure you're in the game when the market starts heading back up is to be in the game now.
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This article was originally published Jan. 5, 2009. It has been updated.
Amanda Kish heads up the Fool's Champion Funds newsletter service. At the time of publication, she did not own any of the companies mentioned herein. Sprint Nextel and Home Depot are Motley Fool Inside Value recommendations. Click here to find out more about the Fool's disclosure policy.
