This isn't a posting about, woe is me, it is about the levels of apathy that prevail in our society. Not only are we sinking politically and economically but we delude ourselves by putting our heads in the sand and thinking everything will be okay. Newsflash folks.
Hope Isn't A Strategy
Recently I posted an article about the Global economic decline into hell. I made the claim that the Dow may settle somewhere between 2,550 and 5,270. This projection was made in October and I want to revise this position based on new information.
To make the projection I will use the method of tinkering with the PE Ratio. Markets are essentially driven by earnings over the longer term but the trick is to ignore past earnings and to accurately predict future earnings. Mmmm, a bit like reading tea leaves, but here goes.
There seems to be analyst consensus that the Dow can expect earnings to decline by 15.5% from current levels, so using that let's crunch the numbers.
Let's assume two PE ratios, the average for the last 50 odd years of 16.50 and the PE ratio that seemed to prevail throughout the bear market of the 1970's of approximately 8.
If we adjust earnings downward and we use the PE ratio of 16.50, we arrive at a Dow of 8,564 or an increase of 29.75%, ummm I don't think so. For this to happen would require an improvement in sentiment. The current trailing PE ratio is 11.50 by the way.
If we do the same thing but we use the PE ratio of 8, in other words sentiment continues to decline, we arrive at a Dow of 4,152 or a further decline of about -37.00%.
So perhaps my original projection was too pessimistic but actually none of us really know where earnings or sentiment will settle. The revised outlook looks like anywhere between 4,152 and 8,564. Now here is a titbit for nothing. Over long periods of time various phenomena revert to a long term average, markets display this phenomenon and it is known as Mean Reversion. If we assume that the long term average PE ratio for the Dow is approximately 16.5 then at projected levels of 13.60 this may display slight undervaluation, but for me not compelling enough. So I don't think we have gone far enough yet to re-enter the market. For those of us that have ridden it down, well perhaps there isn't that much further to go.
Finally, what is the significance of the Dow? The USA is the global economic driver, not Tshwane, so it goes without saying that whatever happens to the US market impacts on the JSE.