Everybody has to throw in their two cents, and the predictions have been wide and varied, some predict the end of this recession will happen soon, by the end of the year in fact, while others say this will last clear through 2011. Who should you believe and why? What are investors looking for before they bring their money back to the stock market? When investors believe there is too much volatility in the market, they tend to flock to safer investments outside of equities, namely they invest in bonds.
The longest bear market and recession in the past 50 years, besides the one we are currently facing, happened this same decade, which some may find hard to believe. From March 2000 to October 2002 the DJIA saw a decrease of nearly 50%, yep, the decrease that preceded the run to over 14,000 by the beginning of October when it neared its peak. Having said that, the people that predicted the market bottom potentially made off like bandits as they realized the companies were undervalued and there was an excellent opportunity to invest. So, how will you know when the market reaches that point?
Most investors consider earnings one of the major determining factors that affects stock prices. That is, how do earnings reports compare to forecasts and or budgets? Current stock prices are in many ways based upon future expectations of company performance. So, when companies continue to miss expectations, and or expectations are simply too high, the stock price is determined to be overvalued, and thus a correction is made in the price. Moreover, panic selling in uneducated investors can and will rear its ugly head as well, but to the educated investor that ugly head means easy money. Over the past year and few months, quarter after quarter, companies were reporting worse than expected earnings per share, and stock prices plummeted. However, you can expect a rebound after some sort of stability in stock price is found in meeting expectations, even bad expectations.
Thus, once a companies earnings and performance begins meeting analysts expectations, the stock price volatility will decline. Until then however, we will see wild swings over short periods of time. Then, as companies start to turn the corner, and beat expectations, you can expect stock prices to begin their climb back up.
Bottom line, look for consistency in earnings before a rebound will occur, anyone whom arbitrarily throws out a date in the future for a recovery without some sort of basis other than things like consistency in earnings is simply guessing.