The Dow Jones Industrial Average, likely the world’s most followed stock index, is down 17.9% in the last 30 days. For the year, the Dow Jones is down 29%. We’d have to go back to the late 1930s, into the later parts of the Great Depression, to see a comparable one-year pullback in the index.
The Dow Jones currently pays a dividend yield of 3.42%. The bear market of 1974 ended when the yield of the Dow Jones reached six percent. To put this in perspective, assuming the companies that make up the Dow Jones Industrial Average see only a 15% decline in their earnings (due to the recession), to yield six percent, the Dow Jones would need to trade below 5,000 (currently 9,447).
Banks are not lending and this is the fundamental problem behind the business slowdown. A business in the United States will have great difficulty walking into its bank today asking for a loan to buy equipment. Now that they need it, banks are taking back the umbrella they gave business when it wasn’t raining.
By any measure, the stock market is severely oversold. Stocks do not go up or down in a straight line. The Federal Reserve continues on its “all out” path to help the economy and the confidence of the marketplace. It seems almost every day the Fed is doing “something” for the economy, the latest being this morning’s 50- asis-point drop in interest rates.
Yes, in 1974, the yield on the Dow Jones reached six percent before stock prices started to rise. But investors and analysts need to keep in mind that in 1974 interest rates were much higher than they are today. In bad times, capital flows to the investment that provides the safest and highest returns.
Concern about the economy has never been so prevalent. I’ve never seen so many people so worried. We have commentators on the news asking economists if a Great Depression is coming. People are expecting “things” to get a lot worse. The herd mentality in Florida, and even New York, today is that the end of the financial world is coming. Just ask yourself this: when has the stock market or economy done what the herd mentality expects?
In late 1999 and in late 2000, the Dow Jones Industrial Average came close to the 7,000 level, but did not fall below that. If there is support, that’s where it is – 7,000.