Steadfast FinancesAn Index Fund Investor's Dream: S&P 500 Earnings are at Record Lows - Steadfast Finances

An Index Fund Investor’s Dream: S&P 500 Earnings are at Record Lows

Filed in Buy on the Dips , Index Funds , Investing 101 4 comments

If you’re an avid index fund investor and still interested in buying stocks, the following chart might be one of the sexiest things you will ever see.

sp-500-earnings-inflation-adjusted-sharpest-decline-in-sp-500-earnings-ever-recorded

Image Credit: Chart of the Day

That’s right!  Earnings for the S&P 500 index have fallen off a cliff.  They’ve fallen so low that earnings are lower in 2009 than during the 1940s — during the lows of the Great Depression.

Today’s chart illustrates that 12-month, as-reported S&P 500 earnings have declined over 90% over the past 20 months (with over 90% of S&P 500 companies having reported for Q1 2009), making this by far the largest decline on record (the data goes back to 1936). In fact, real earnings have dropped to a record low and if current estimates hold, Q3 2009 will see the first 12-month period during which S&P 500 earnings are negative.  —  Chart of the Day

This really isn’t surprising when you consider just how bad the recession has been.  Once the financial crisis kicked into overdrive and fear was so widespread you could cut the tension with a knife, Wall Street analysts slashed earnings estimates for the S&P 500 listed companies with such ferocity they began to resemble Freddy Krueger from Nightmare on Elm Street.

But, with crisis comes opportunity.

As I’ve said before, the stock market crash of 2008-2009 has hit everyone hard.  But if you’re a member of Generation X or Generation Y, you’re almost certainly looking at an event that resembles a Halley’s Comet type of event that only comes around once every 75 years.

I’m not alone in my reluctant bullishness when you take into considering that legends like Jack Bogle have said American businesses are essentially on sale.

Whether you want to take advantage of this buying opportunity is entirely up to you.  Most investors have been through one heck of a roller coaster ride.  But for me, a decimated stock market is just one more reason why I love the recession.

Does this chart make you want to invest more?  Maybe less?  What is your plan on investing for the rest of 2009?  Or did the market completely scare you off and you’ll wait for better news?

What say you?

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Posted by CJ   @   18 May 2009 4 comments
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4 Comments

Comments
May 19, 2009
12:05 am
#1 SJ :

I’m a poor 22 yr old grad student… I’m throwing what money I do have laying around into a roth ira and what not =)

I am also not extremely bright… but this chart shows earnings vs. time? Doesn’t that just mean the S&P quality has dropped? I mean, ignoring such things as pricing?

May 19, 2009
1:00 am
#2 Matt :

Yes, it’s Earnings (per quarter) vs. Time. It’s one of the more traditional ways to track the “health” of the economy, as well as setting the historical mean so we can find entry and exit points based on earnings growth.

Quality might not be the best word to use, but for arguments sake, the best time to buy is when the quality (aka – prospect for future earnings growth) is at it’s absolute worst.

I’ll use the “buying an old farm” example:

The best time to buy a farm is when farmers have suffered a dust bowl, a 5 year drought, land is selling for 1/4 of what they were 5 years ago and nothing grows but weeds. By then, everyone who owned a farm is desperate to get out. At that point, the only thing that can happen for you is a prolonged state of flatline growth or the situation slowly improves. Years later when everyone wants to own a farm again, sell it back to willing buyers. Repeat cycle as necessary.

Hope that helps… and I was also a poor grad student! Fortunately the tech bubble started in 98 and I bought semiconductors and crappy dot.com companies at the right time.

May 19, 2009
3:42 pm
#3 SJ :

Well even in the “old farm” example if the farmer wants a lot of money for it then not a great deal lol.

But I mean, I agree with you, it probably is a great time to be young and investing…

May 19, 2009
5:00 pm
#4 Matt :

Absolutely! The main point of that old example is to buy when the market variables line up in your favor.

It also illustrates that the best time to buy is not (usually) when everything seems rosy and calm.

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