It's been an amazing year. The S&P 500 is down 37%. In its entire history, the S&P 500's previous worst year was 1974, when it dropped almost 30%.
But I don't even consider the worst drop in the history of the S&P 500 (and let's face it -- the market has recovered somewhat recently) this year's most amazing event. There are three things I find even more unbelievable.
1. The insane volatility
This year's market displayed insane ups and downs. At this point, a 3% down move seems to me like a relatively calm day -- although it most certainly isn't.
There have been approximately 13,000 trading days since the S&P 500 index was created on March 4, 1957. Before this year, there were only 45 one-day drops of 3% or more. This year alone, there have been 23.
In fact, of the 100 worst drops in the history of the index, 28 happened in 2008 -- and all but five since September. The ratio only gets worse as you narrow the field. Eleven of the top 20 losses took place in the last three months, and three of the top five.
But the news hasn't been all bad. We've also seen 18 of the 100 biggest one-day gains, including four of the top five. Somehow, that doesn't seem to calm the nerves.
What do these statistics mean? First, these aren't normal times, or even unusual times -- they're unprecedented times. Second, if you can handle this volatility, you can pretty much handle any market. Third, if the second-, third-, and fourth-biggest drops in history don't count as capitulation, what does? Is capitulation just another after-the-fact rationalization invented by market commentators?
2. The massive stimulus
To combat the credit crisis and the recession, the government has unleashed a staggering amount of firepower. First, the Fed chopped the Fed funds rate down to 1%, tying record lows -- and it'll probably go lower. The Fed has also started coordinating cuts with central banks around the world.
Then you have Treasury Secretary Henry Paulson buying equity with the first $350 billion from the Troubled Asset Relief Program (TARP). The nation's biggest banks -- Bank of America
On top of this, you have the Fed buying up short-term debt to provide short-term liquidity to businesses. This isn't a small effort -- right now, the Fed has $2.2 trillion in assets on the balance sheet, up from about $900 billion a year ago.
And that's just the government stimulus. Oil and other commodities have fallen significantly, freeing billions of dollars to circulate into the broader economy. Taken together, there's an awful lot of stimulus right now, even for our huge $14.4 trillion economy.
3. The cheap stocks
The price of equities is now stunningly inexpensive. The S&P 500 is trading about 12.6 times this year's earnings estimates, and 9.9 times estimates for 2009. Sure, next year's estimates may be optimistic, but with the whole world cooperating to solve its problems, it's hard to imagine that the economy will be even worse this time next year.
Note also that the 9.9-times estimate is just the average. There are many huge companies with solid competitive positions trading far below that level.
And these aren't even the best opportunities available right now.
The Foolish bottom line
This is likely the biggest bear market you'll ever experience, but it could also be the best buying opportunity you'll ever have. It's not easy -- some companies have failed, and more bankruptcies will follow. But with some careful stock-picking, you now have the opportunity to position your portfolio for outstanding returns for the next decade.
Our Motley Fool Inside Value newsletter team is doing just that. We've been combing through the wreckage looking for the truly outstanding opportunities. In December's issue, we've identified our top five stocks to buy right now. You can read about them with a 30-day free trial. Just click here to get started -- there's no obligation to subscribe.
As Fool contributor Richard Gibbons was writing, he shrugged off the ninth biggest down day. He owns shares and call options on UnitedHealth, as well as shares of Harley and Polaris. UnitedHealth made the cut at both Motley Fool Inside Value and Stock Advisor. Bank of America and JPMorgan Chase are Income Investor recommendations. The Fool owns shares of UnitedHealth. The Fool's disclosure policy is very, very calm.