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The Real Reason Stocks Are Falling

Posted by: Ben Steverman on March 9, 2009

Monday was another down day for the market, with the S&P 500 index falling 1% to another 12-and-a-half-year low of 676.53.

There’s been a lot of talk lately about the Obama administration and the stock market, some of which I’ve contributed to. But let’s not forget there are strong explanations for the stock market slide beyond politics.

The stock market took Friday’s dismal jobs report in stride, probably because investors were already expecting nasty data. But it was a terrible report nonetheless. Warren Buffett said Monday that the economy has “fallen off a cliff.” Economists who studied the report are now lowering estimates for the rest of the year.

Like Deutsche Bank’s (DB) Joseph LaVorgna. He lowered his estimate for third quarter GDP from zero growth to a 1.5% decline, and fourth quarter from positive 1% to negative 0.5%:

The unemployment rate, which we previously expected to rise to 8.7% by year end and peak at 9.2% in Q1 2009, we now see rising to 10% by year end with a peak of 10.5% by the middle of next year. Although, given the fragile state of the economy, particularly the Big 3 automakers, we worry that the unemployment rate could top 11%.

So much for the economists. What about the other side of the trading floor, where the technicians are huddled over their charts?

You can read for yourself today’s take by Schaeffer Investment Research’s Todd Salomone. It won’t cheer you up. He writes:

A bottom will occur when there is a lack of interest in attempting to call a bottom, or there is a belief that a bottom is nowhere on the horizon. Unfortunately, we are still not seeing the despair that is usually found at major market bottoms.

Some analysts believe the S&P 500 could stop falling at the 600 level, which Salomone writes:

…would represent a multiple of 12 times earnings, based on estimated earnings for the SPX of $50. One has to wonder if anyone can call the bottom based on valuations, as future earnings estimates are questionable at best. Moreover, why a multiple of 12?

An article in Monday’s Wall Street Journal, “Dow 5,000? There’s a Case for It,” looks at the various scenarios for earnings and what they mean for stocks:

Looking solely at valuations, namely price relative to earnings estimates, the S&P at 500 isn’t necessarily a wild stretch. The current 2009 earnings estimate for S&P companies is about $64 a share, down from about $113 last April, according to S&P. Goldman is now predicting $40, having cut its forecast from $53 in late February. Bank of America Merrill Lynch estimates $46 a share, and Citigroup is predicting $51.

The S&P 500 had a forward price-to-earnings ratio of 11.3 in the bear market of 1974 and 8.5 in 1982. “Put a multiple of 10 with estimates of $40 to $50 a share and the S&P comes out at 400 and 500,” the WSJ writes.

For the record, stocks are now trading at September 1996 levels, and in the 12 months before September 1996 the S&P 500 earned $39.40 per share. That was a trailing P/E of 17.

In my opinion, investors won’t get much from wading into all this discussion about valuations, technical indicators and market sentiment. Except perhaps a headache. All the numbers and historical comparisons just add to the confusion, especially when this year’s earnings are mysterious at best, as are future growth prospects which help determine P/E.

Market chatter about politics in Washington is interesting because policy choices may affect earnings or the economy. However, exactly how that will happen is hardly clear, and partisanship and ideological prejudices make reliable predictions hard to find.

So, at the risk of stating the obvious, I’ll try to boil down my take on the market:

Compared to expectations, the economy is getting worse, hand in hand with the outlook for corporate earnings. So, the stock market is moving lower.

The stock market could rally temporarily for any number of reasons (i.e., technical factors, valuation arguments, policy changes). But no rally will be sustainable until the economy and earnings prospects stabilize.

Reader Comments

Major Headache

March 9, 2009 6:06 PM

If that isn't stating the obvious, I don't know what is.


March 9, 2009 6:13 PM

You are trying to argue that stock prices are entirely based on the expected earnings of the companies, and that the market is completely rational. It isn't, never has been, never will be. Facts are, at present, some companies are making losses, and some are going under (usually for liquidity reasons, not profitability), but the vast majority are STILL MAKING PROFITS. Repeat that last point several times, folks. Business is down significantly, but if it were down as much as some seem to think, we'd have 30% unemployment. We don't. We've lost 5% on top of the 5% we already had and the 5-10% who were already 'under employed'. Thats an overall number. Some industries like autos are worse. But not everything is in the tank. Further, we're still in the 'shakeout' phase which is generating job losses. People have over-cut in many instances for fear of big reductions. Now its true they've also furloughed a lot too, and ultimately they may also become losses. And even if those still employed have cut back spending, they haven't cut back by 30%. They still need to eat and pay the rent. The savings rate went up to 5% only from 0% as people hoard cash. Its likely company earnings will suffer while cuts are made, but they may stabilize very quickly once these 'one time' effects are done with. No point in investing when we're still in cleanup mode, but in my opinion, cleanup may have happened faster/deeper than some think - it just took a while to happen.


March 9, 2009 6:26 PM

Current market slide is predominantly due to politics. The job data is the symptom, the root cause is the current politics which provides no incentive for employers to hire. Let us look at the politics one by one and see how it impacts.

(1) Tax hike on capital gains restricts free movement of capital to where it can be productively deployed resulting in new hires except leaving the shore

(2) Massive government spending and increase in entitlements takes good money resulting in contraction of GDP
Proof is Japan’s decade long GDP. contraction whilst government spent massive amounts.

(3) Cap & trade, with the cost of doing business increasing one can reasonably expect profit margin going down

(4) Demonstration of immature foreign policy, while snubbing our strong ally (British Prime minister) focusing on Cuba does no ring confidence on the President’s clarity on vision

Unless there is a reversal all the pessimistic doom predictions may not be all that pessimistic. At this time we are witnessing the US transitioning from Capitalist to Socialist economy until the market reflects the new reality the market’s bottom is anybody’s guess. One cannot go wrong in being overly bearish.


March 9, 2009 6:44 PM

The reason is simple - people are not buying the load of fertilzer being peddled by Brokers, Wall Street, and Government. We are not pumping up the stock value, with our money - which is rapidly converted into the banks accounts of the CEOs, CFo's, Brokers, etc.


March 9, 2009 6:54 PM

Apparently economists are laggards when calling economic turns. Or maybe just dullards. Swilling too much conventional wisdom can make you permanently stupid.


March 9, 2009 6:55 PM

generalizing for the lump sum of the earnings misses the amount of profits actually being generated. just because a bunch of banks "lose" 50Billion doesn't mean that the overall valuation of the stock market will go down by 50B * 10 or 12.

So JC Penny's is earning 50 cents instead of 1.50 ...they are still earning money. And that means their vendors are probably still earning money but less. So their valuations will go down but will be buffeted by dividends and future expectations. Take out the financial losses and what does the S&P earn?


March 9, 2009 7:06 PM

I agree with John. The talking heads on TV make it sound like the sky is always falling. The problem is that the government is watching too much TV. They think that by turning the market in a positive direction, the recession will be over. It won't be. People need to know that unemployment is high, but 92% of us are still working. 11% of homes are in foreclosure, but 89% are not. What America is learning is that credit is not free, money is not cheap. We're not buying as much as we used to, but we've always bought more than we needed. Maybe it IS time to start saving for what we want as opposed to "putting it on the card".


March 9, 2009 7:22 PM

I think this is a pretty classic case of the government propping up asset values and not allowing the market to clear. IF the government would grow a pair and tell everyone that there will be no more bail outs, that the market is indeed coming to an end, the idiots would get out of the way and let assets fall to where they need to be. There IS a bottom and it happens when the price falls enough to shake out the losers and let the cash hoards invest accordingly. So long as we prop up the market, we can expect more of the same long slow decline.


March 9, 2009 7:23 PM

Since about 2002 I have been looking for S&P 400 and DOW 3000. That is the long term trend line.


March 9, 2009 7:43 PM

Economics and earnings are always behind the curve in predicting stock market turning points.
Some of the factors that could turn markets up to various degree are:
1. Madoff & Stanford in jail
2. Naked CDS ban, and outstanding CDS listed at CME
3. Executives & ex-executives of Wall Street voluntarily pay back last 5 years of bonuses
4. US & the world sign WTO accord to increase trade to counter decline in trade
5. Huge forced injection of capital into 5 biggest US banks & AIG and management sacked and replaced with competent & honest bankers with actual good track record
6. No bailout for all other firms & people
7. 2 million green card citizenship to foreigners to buy US houses
8. No off balance sheet items allowed in deposit taking banks
9. Leverage of investment banks cap at 20 times inclusive of all positions
10. Tax incentives for profitable banks to buy weak banks
11. fiscal spending on new growth areas of green energy & bullet trains.

Let's be realistic Americans have borrowed too much money and need sometime to work off the debts. All we should aim for is some stabilization in the markets for the next few years with about zero GDP growth. George Bush & Cheney had already used up all the bullets.

PJs of Inside Stock Purchases

March 9, 2009 7:44 PM

The writer should go to and run stock quotes for the Fortune 500/100, and look on your left, click on Executives, then click no their names - what you will notice is since Clinton, C level have doubled their monthly paychecks by breaking open their outside investment portfolios and bringing in wild family fortunes and purchasing stock in their companies (look at CEO compensation on, the chart and the above is an SEC feed), and that's where the money went, from investments to company stock purchases and inside investment tools.


March 9, 2009 8:45 PM

Historic stock market returns are about as useful as historic Social Security returns. Something like 35% of stock is earmarked explicitly for retirement, in the form of pension funds and 401K's. If there will not be enough future workers to fund SS benefits, who is going to buy all the stock when the baby boomers want to cash out for retirement Be thankful the Republicans did not succeed in diverting SS funds to Wall Street, though perhaps the influx of those funds might have kept the bubble inflated long enough to allow another Republican to be elected, while the insiders cashed out their own holdings.


March 9, 2009 8:51 PM

Recessions are always self correcting. Obama felt this one required a stimulus of nearly one trillion dollars -a stimulus that completely ignored the stock market. Repeal cap gains tax for at least a year and watch the result.


March 9, 2009 8:53 PM

It seems that all experts are now trying to outdo each other in predicting lower equity prices.....even The Oracle of Omaha is scared...perhaps we are truly reaching bottom now.

John Mattoon

March 9, 2009 9:06 PM

John B,have you tried talking to the blue collar group? under employed is an understatment!I make about half of what I made in 2000 from 79000 to 37000 a year just like most of my friends,I am a tool & die maker. The goverment saw fit in tax exemptions and such to make it cheaper to ship it all overseas. How about reversing all this and bring the jobs back.Give the american people a break. I don't know where you get these unemployment #'s but in the area I live... double your numbers!


March 9, 2009 9:09 PM

It's obviously very important for Wall Street and friends to miss the point,{take the 5th?!}publicly anyway. NO CONFIDENCE as a blanket sentiment is what I see everyday all across America...those parading as politically correct and oblivious to the productive aspects of capitalism as a whole notwithstanding.
How long can anyone make money{short the market?} when no one has any money?


March 9, 2009 9:13 PM

We need the measures that the Obama administration has implemented to begin yielding some quantifiable, positive results-no matter how small they may be. There needs to be reassurance (not just rhetoric) that the actions thus far sought are WORKING. As long as the notion that we are attacking these problems with various forms of futility remains unobjectionable,fear will predominate, and the markets-as we have been seeing- will continue to tumble. I am hopeful and cautiously optimistic that the measures taken by the Obama Administration should begin showing themselves in economic reports going forward. Myself, unlike most am also aware that what this economy needs now more than anything else is simply time. Action has been taken, but time must be allowed for it to begin proving its efficacy. There is no such thing as an impatient, successful investor--it is time now to be prudent more than ever.


March 9, 2009 9:23 PM

FROM TODAY 9/9/09 THRU 12/20010 THE DOW



Elite Shadow

March 9, 2009 9:57 PM

Dow will bottom at 2,800.

SnP will bottom just under 300.

the Nikki fell 4/5s from its 1989 high to its 2004 low.

keep hoping, coz u got BHO telling you all its time to buy stocks.

Index traders will be taking your stock vestments off the table - each and every day until the criminal bank cartel feels its time to start reversing the trend.

As of now, Charter members of the Fed are not ready to snap up companies of their choosing.

The blood letting will continue.

Enjoy the coming bank holiday.

Suzanne Lainson

March 9, 2009 9:59 PM

I agree people still need to spend money on some goods and services, so the entire world isn't going to collapse. But what is hard to discern is how much of the world's economic systems were built on unnecessary consumption and on house-of-cards financing. So there is probably significant room for tightening. That means we may never get back to where we were. I'm hoping that when we make it through, we will be better off. Fewer choices in consumer goods, but better infrastructure.

Suzanne Lainson

March 9, 2009 9:59 PM

I agree people still need to spend money on some goods and services, so the entire world isn't going to collapse. But what is hard to discern is how much of the world's economic systems were built on unnecessary consumption and on house-of-cards financing. So there is probably significant room for tightening. That means we may never get back to where we were. I'm hoping that when we make it through, we will be better off. Fewer choices in consumer goods, but better infrastructure.

Gee Haw

March 9, 2009 10:08 PM


The biggest thing is that there is nowhere in the private sector to invest.

All of the bail-out money and stimulus money is going back into the government some how.

The government is the one that is doing upgrades to their energy systems. But there is nothing for private companies that would be willing to do research into alternative fuels, lower emissions and the fuel/energy crisis we all thought we were experiencing just 8 months ago.

And where is my personal incentive for energy conservation measures.

I'd be glad to put some of my cash into my shovel ready energy conservation plan together, but we can't get that off the ground. Especially since I'm no longer invested in stocks. I think a great plan for me to save 20% off my electrical consumption over the next ten years or so.

How about a little stimulus for me. Maybe just a little more than a $2,000 tax credit on my $25,000.00 project???

I think our government has completely lost sight of the forest because a tree is in the way.

Some how we have to get the big money and markets moving by stimulating and not saving the private sector.

You will never stimulate private investment by adding additional taxes to private uninvested money that's making 2% or less interest.

And the government's so called economists saying the real problem is the banks will not lend money and credit is too tight. Let me tell you, there is money to lend, but anybody would be a fool to borrow it at even 4% when you can only invest at negative 20% in the private sector (stocks). And if you had it to lend, you wouldn't for the exact same reason.

It's the viable private sector that needs the stimulus money. And NOT companies or banks or people that are already busted because of some past poor decisions and excessive risks that they took.

Sooner or later we have to move along here and it want happen by tossing more good money after bad.

We can see the ones in trouble. Lets cut that dead tree and move ahead.

My Rant is finished.

O.B. Ron Quixote

March 9, 2009 11:31 PM

Trying to assign a valuation to any class of investments - such as equities - in a vacuum is myopic. The truth is investors will always seek the maximum return for their investments. And to analyze where any index of stocks may end up in the future (or have been in the past) is no more than mere speculation unless one considers the returns of alternative competing investments at the time.

Without that critical context, any analysis of where a given stock index will end up is - at the very least - woefully inadequate.

Christopher Holland

March 9, 2009 11:52 PM

Sounds like J P Morgan's stock market prediction following the 1907 Wall Street crash - 'if it doesn't go down then it will probably go up'.


March 9, 2009 11:56 PM

It is still early in the recession, if unemployment hits 10.1 percent, unemployment based on the U6 labor of statistics would be around 20 percent. It is currently 14.8 percent. Moreover, over 100,000 jobs have cuts in salary from three companies, fedex express, GM, and etc.

A cut in wages, and the commercial real estate is still to drop. We are only in early part of recession. According to bloomberg, the us is already in depression. The banking index, car industry, housing industry, commodities industry have already hit depression levels. The banking index already surpassed the depression level. It took 43 years for the banking index to recover from 1929 depression.


March 10, 2009 12:54 AM

If stock prices were not based on reality during the Bull market, why would reality prevail during a Bear market.


March 10, 2009 1:25 AM

Globalism is part of the problem. In war long supply chains are a problem. They are expensive to operate and subject to disruption. It's the same in peace time. Global supply chains are expensive and you have to have a global military presence to protect them. That ultimately sucks the life out of your economy.


March 10, 2009 4:43 AM

They still don't get it. Aren't these the same intellectually bankrupt morons who spent the last eight years cheering the spin? Am I the only one in America who saw the economy of the last six years for what it truly was... a phantom? Even as the house of cards was smoldering in a slow burn, the very "experts" who are supposed to know these things were busy arguing, right up until October 2008, about whether or not it could technically be called a recession. It turns out far worse than a recession, the bottom was falling out of the house of cards; and they didn't see it coming either? They were clueless then, and I'd bet they're even more so now. My guess is they couldn't see the "bottom" of anything if it hit them hard enough in the face to damage a few nerves.

We'd all do well to remind ourselves of Alan Greenspan's fateful words in his December 5, 1996 presentation, "The Challenge of Central Banking in a Democratic Society:"

“ [...] Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? [...] ”

Reality check: Is it at all possible that those irrational, "escalated asset values" are simply self-correcting, allowing the invisible hand of the universe to do what it often does so well?

Something had to give; and it did. One thing's certain: Main Street came through the last eight years more resilient than ever and will come through this just fine. If no other good comes of it all, a timeless truth has been irrevocably exposed: the economy does indeed trickle UP after all, not down. So much for tax-cuts that were supposed to trickle down but went up in smoke instead by way of derivatives! So much for cooking the books simply to fatten up their bonuses, even as they ran their companies into the ground! So much for the Jesus syndrome that gave us recycled mediocrity masquerading as expertise. The bigger they come, the harder they fall. It's only fitting that those who did the most damage looting America should stand to lose the most. If their collective, deliberate acts do not constitute treason, I don't know what does. Just this once, maybe America will have learned to put far less faith in "experts" tainted with the hidden agenda of their own self-interests. Could this herald a return to common sense? And while we're at it, just maybe the press will find the courage and spine to return to its true role of asking the tough questions, rather than self-promotion of their own celebrity.


March 10, 2009 5:44 AM

factor in inflation fears due to reckless monetary policy and you get completely different figures


March 10, 2009 9:58 AM

Maybe it won't come back. We've depleted so many vital resources that won't come back: oil, water, phosphorous, etc... How can it all come back?


March 10, 2009 10:28 AM

Everyone knows that stocks and the market in general rise and falls just like the sun rises and sets everyday. It always has and always will. The extent that stocks rise and fall varies according to how cloudy we become with our confidence and our patience. This is normal "Free Market Activity". Now when we become very dismayed, the "Wall Street Experts" and our government leaders want to tinker and tamper with the normal flow of the markets. This is when it all starts going into a tail spin and ends up taking years to get the thing back on flying straight and level again and maybe starts to climb higher. In you plan to be in this game, your playing time should not be less than 10 years, and each year you need to access your end time, limiting risk vs reward. Do I think I know why stocks are falling now, wait a second and let me find my crystal ball again. I have been in the market for 40 years and I have only come to learn than I know much less than I did when I started. How are I doing now, not bad at all.


March 10, 2009 12:10 PM

if we are focused here on what might boost the stock market, I wonder what would happen if there were a suspension of certain types of short selling? As a full time investor I believe that you would see a much quicker turnaround. As long as there is significant money to be made shorting the market the market will stay down. My overall observation is that most investors are pessimistic and bearish. They tend to be conservative in their politics and so are down on the trickle up measures in the works. So as long as they can continue to drive the market down by shorting every rally the market will go down further and their prophesy becomes self fullfilling. I believe their is a higher percentage of Limbaugh "I hope this fails" sentiment in the finance/investor arena proportionally than anywhere else besides copr America and these 2 are tightly entwined.
There are millions maybe billions of bear plays made daily on the stock markets causing "artificial" downward pressure. I ask everyone out there who is using this strategy if they could forgo those short term gains for the chance at a quicker and sustainable turnaround and the far more sustainable profits of a slow and steady rally? Because to say no is really just the same "me 1st, show me the $ now" sentiment which is at the root of much of our problem today IMHO. I would go so far as to say that it is unpatriotic if that is the primary way an investor makes their $ in todays market. it is time to temper this "free market, anything goes if it even marginally legal" mentality with alittle more awareness that each of our actions no matter how small are magnified into trends at a macro level. It is because every other investment vehicle, economy and currency is down that the stock market-allowed to respond to "real" forces could actually grow. Gold is not skyrocketing as many predicted, bonds are abysmal, currencies are unpredictable and require far too much time & technical knowledge to trade, and overall many of the alternative investments traditionally available are intrinsically worthless. Equities are a piece of a company with real people, profits, job creation. Gold is a hedge, bonds are paper and tho useful to help the gov't backstop it's debt do not create wealth per se. Real estate will be years coming back and should not be driven primarily by a profit motive anyway.
I have heard rumors that the Administration is considering this a suspension of certain types of short selling and I applaud it. I urge everyone to let your Representatives now if you support this policy. You want to quck positive action-try this! It has historical precedence and I pray it happens in some form. You can still be bearish but you can do so in a much less damaging way. We all know the market will trun around, a bottom will be found. it is really collectively up to us when. Why not sooner than later?


March 10, 2009 3:02 PM



March 10, 2009 5:06 PM

The End may be near, but the arrival is asymptotic. ;-)

Joe Flood

March 13, 2009 11:29 AM

Market bubbles are not caused by people going short but by people going long and borrowing the money to do it. If restrictions are to be placed to stablilize the economy, it should be to target the bubble market traders on stocks and property and their financiers

nadine brown

March 20, 2009 2:09 PM

insider traders should be arrested who cares if they are women they are hurting women like me. Innocent people are being hurt and the reason i found out is this.
Because of the new department of justice statute of 2005 Violence Against women. Women cannot be cited for violations of the law because of violence against women. So when a women committs an act of insider trading and steals money from an innocent person like me she goes uncited because of the department of justice..
I have been robbed blind ...

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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