Sure, Dow 10,000 gives me goose bumps, too. But how soon we forget: It was only a few months ago that Dow 5,000 was on everyone's mind.

Optimism can be fleeting, Fools: Just because Dow 5,000 seems to be in the rearview mirror doesn't mean stocks won't plummet from here. In fact, the worst could still be ahead.

And history agrees.                                                                          

What goes up ...                     
The history of long-term market downturns is hideous. When times are bad, markets don't just get drunk with fear -- they start downing vodka shots of the stuff. When panic sets in, nobody wants to own stocks at any price. Investors' palms begin to sweat every time they watch CNBC. They bury their heads in the hope that the pain will go away. They throw in the towel and sell indiscriminately. Stocks hit the pavement and stay there not for months, but years.  

Don't believe me? Have a look at the average price-to-earnings ratio of the entire S&P 500 index over these three periods of market mayhem:


Average S&P 500 P/E Ratio







And while stocks have plummeted over the past year, so have corporate earnings: The S&P 500 currently trades at around 20 times earnings. Compare that with the above table, and it's pretty apparent that stocks could fall much, much further, just by returning to the lows around which they historically hover during downturns.

Assuming earnings stay flat, revisiting those historically low levels could easily mean a 50% decline from here. Easily. Now, I'm not predicting, warning, or forecasting -- I'm just taking a long look at history.

But what if it did happen? 
What would happen to individual stocks? Here's what a few popular names would look like trading at P/E ratios of 8:


Decline From Current Levels With P/E of 8

Microsoft (NASDAQ:MSFT)


JPMorgan Chase (NYSE:JPM)


Bank of America (NYSE:BAC)




Exxon Mobil (NYSE:XOM)


Visa (NYSE:V)


Johnson & Johnson (NYSE:JNJ)


Look scary? It is, dear Fools. And it could easily happen. It has in the past, and it'll probably happen again.        

If there's a silver lining, it's this: Falling back to such painful lows would be the opportunity of a lifetime. The only thing that pushes the average stock to such embarrassing levels is an overdose of panic, rather than a good reading on what the company might actually be worth. 

Be brave 
As difficult as the past year has been, following the "this too will pass" philosophy really does work. No matter how bad it gets, things will eventually recover. The best days lie ahead. And those brave enough to dive in when no one else dares to touch stocks will end up scoring the multibagger returns.

Need proof? Think about the best times you could have bought stocks in the past: after the economy recovered from oil shocks in the '70s, after the magnificent market crash of 1987, after global financial markets seized up in 1998, and after the 9/11 attacks that shook markets to the core. As plainly obvious as it is in hindsight, the best buying opportunities come when investors are scared out of their wits and threaten to give up on markets altogether.

Pick what side you'd like to be on 
The next few years are likely to be quite a ride. On the other hand, the history of the market shows that gloomy, volatile periods also provide once-in-a-lifetime opportunities that can earn ridiculous returns as rationality gets back on track.

If you need a few stock ideas, our team at Motley Fool Inside Value is sifting through the market rubble to find those opportunities. To see what they're recommending right now, click here to try the service free for 30 days. There's no obligation to subscribe.

This article was originally published on Oct. 18, 2008. It has been updated.

Fool contributor Morgan Housel owns shares of Johnson & Johnson. Microsoft is a Motley Fool Inside Value recommendation. Johnson & Johnson is an Income Investor pick. The Fool has a disclosure policy.