Retiree2001,
I don't have a crystal ball. While I wrote a good number of columns that were critical of home prices, home speculation, and irresponsible financing I had no idea of when the bubble would break or how serious it would be. And, like the vast majority of investors, my portfolio has been going mostly down since peaking late last year. Fortunately, the decline has been softened by investments in energy, REITs, TIPS, and foreign bonds, but overall value is still lower.
All we can know is history. History tells us that equity markets are climbing 80 percent of the time and declining 20 percent of the time. It also tells us that recessions have beginnings, middles, and ends. And it tells us that markets can go sideways for a long and frustrating time.
The 70s is instructive here. The 73-74 decline was devasting. It was the worst since the Great Depression, though it was slightly surpassed by the 2000-2003 decline, depending on how you measure. After that, rising inflation caused equity markets to go sideways for years. Corporate earnings rose but the amount investors were willing to pay for a dollar of earnings sank. As a consequence, P/E ratios fell until 1982. That's nearly a decade of misery.
(And, not to worry, it was an equal suffering opportunity market--- bonds fell over the same period because interest rates rose until late 1981.)
Now consider the current market. If you start in 2000, we're close to matching the misery of the 70s already. If we view things in terms of history, the odds favor a recovery within the next 12 months. If it doesn't occur, the current decline will be one for the record books.
One of the most bothersome things about the current decline is its presentation on television. Last Friday I watched a number of the afternoon markets shows and was appalled at how the Fannie Mae/Freddie Mac story was treated. There was a maximum of speculation, near gossip, and an absolute minimum of real data. I felt as though I was attending a convention for theater shouters, each trying to cry "Fire!" louder than the next.
I also have a sickening feeling that the articulation model for modern television has been stolen from World Wrestling Entertainment...
Bottom line: if you are still accumulating, this is a major buying opportunity. If you are a retiree with a distributing portfolio, the best course is to button down your spending and hope that a replay of the 1982 market will be coming soon.
Scott
