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The Dow and S&P are both within reach of hitting all-time highs despite the housing and credit problems. Is this irrational?

The international press often runs articles talking about the Fed bailing out the U.S. markets (again). Maybe the Fed bailed out the equity indices to the point where they can make new highs again so quickly and without the market properly digesting the problems.

My question is: Have the U.S. stock markets ever been so near all-time highs when the risks of a recession are seen as 30-50%?

2007-12-05 12:24:14 · 3 answers · asked by Anonymous in Business & Finance Investing

3 answers

Perception is reality. When I was a 6th grader in the New York Metro area we subscribed to the NY Times. We picked a stock and tracked it, graphed its ups and downs, and found out about the companies workings. It was a math, economics and social studies lesson. Back then, before the advent of computers, what happened in the stock market foretold what would happen 6 months down the road in real time. When a company hired 20.000 people its stock went through the roof. That happens now when 20,000 people are laid off. The world has been tipped on its head. During WWII, the war revived our depression economy. This war has completely drained it(mostly because we are no longer an industrial economy). Its all a house of cards. Some idiot from CNBC says calm down and the greedy go on a buying spree. You also need to take International and instiutional stock purchasing into account. Now that computers are responsible for much purchasing, everything is instantaneous. What happens in our market is instantly felt worldwide and vice versa. We who don't own stock will not fall as hard when the house of cards is blown over by the winds of change this recession will, no doubt bring

2007-12-05 12:47:55 · answer #1 · answered by Stephen C 4 · 0 1

Well, yes, the stock market often looks high before it falls back -- but you didn't ask the important question: "High compared to what?" Since the stock market as a whole has consistently risen over the LONG term, then of course it will often be at or near new highs before something bad happens -- but it will also be at or near new highs when the bad thing's quite a way off, too.

That's why a better way to judge whether it's "high" is to compare P/Es, for example, and particularly P/Es in relation to what you think earnings are going to be in the short or intermediate-term future. And that's particularly interesting right now.

Aside from the ongoing credit/mortgage debacle, earnings are holding up OK and the P/E of the S&P 500, for example, don't look really expensive. So predicting that the S&P will go up or down in the intermediate-term future partly depends on whether you think that the credit problems are enough to make earnings of *non*-financial companies tumble down too. (If it's only financial companies, or better yet only some financial companies, then the problem will be contained and the impact, while non-trivial, will be less.) The Fed's actions have the net effect of lessening the impact, but it's not like they control everything, they only have a couple of relatively crude levers to yank on.

I think that the impact will be contained but I am not completely confident or secure in this thought, and am trying to keep track of the various hints that the problem will be more or less contained.

2007-12-05 14:08:12 · answer #2 · answered by enoriverbend 6 · 0 0

1929 -- right before the depression
1987 -- right before the junk bond problems and S&L crisis
1990 -- right before a recession

Yup -- I'd say so. In fact, the stock market is USUALLY too high just before a recession.

2007-12-05 12:41:35 · answer #3 · answered by Ranto 7 · 0 0

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