What people seem to have forgotten is that the S&P had fallen 24.6% when we hit the bottom on March 9th. We need to keep in mind where we've been and where we need to go to make absolute gains a reality. As of yesterday, the total return on the S&P (that is, including dividend returns) is 5.4%. In order for us to return to the closing level that we reached on December 31, 2007, we need a total return on the S&P of 58.7% this year. So with all of this fever around the run-up in stock prices, we're still not even close to getting back to where we were. We still have a long way to go. Also, market returns over a 90-day period hardly can be relied upon to be an indicator of general business fundamentals. Maybe this is the beginning of the next bull. Maybe not.
I have no idea where stock prices will go this year, but I do set the benchmark for bottoms this time around by looking back to the last true broad behavior changing market of '73-'74 (equities are dead?). In that market P/E ratios bottomed out around 6 or 7 whereas the current P/E ratio is around 13 or 14 (estimates depend on methodology). The relative price level between this market and the 73/74 market is notable. Yes, interest rates were higher then, in theory supporting lower prices, but there are plenty of reasons that we could be in worse shape now than then. Bottom line, I think prices could go much lower, but, again, I have no idea if they will or not. We'll see.
