As U.S. Markets Near 52-Week Low, How Far Can They Fall?

The S&P 500 is precariously close its 52-week low. If it breaks below that number, how much further might it fall? Recent history suggests the possibility of a long drop.

The S&P index is trading at 1,136, against a 52-week high of $1,371 and a low of $1,102. It topped $1,353 just a little over two months ago. Since then, stocks have sunk due to concerns about the possibility of a new recession and worries about a collapse of the debt markets in some of the eurozone's most economically fragile nations.

A return to recession appears more likely by the day. U.S. consumer confidence is near lows last seen two years ago. Last week, stock markets dropped the most they have, on a weekly basis, since 2008. Unemployment numbers have barely improved over the past three months. And the the housing market shows no signs of improvement. Some economists believe prices won't recover in certain markets for years.

Since the stock market hit its cyclic nadir in spring 2009, the backbone of its long rally has been strengthening corporate earnings. Those gains were driven in large measure by cost cutting. Sales have been slow to recover because there has been no strong economic recovery in the U.S., but productivity has increased sharply as companies figure out how to get more from each worker. Yet cost cutting can only go so far, and that trend is faltering after nearly four years of downsizing. While many employers may not cut more jobs, they aren't hiring much either. Companies want to wait and see whether they can afford new workers. And President Obama's tax credits for hiring won't help much if firms think a new downturn is near, because a tax break can't offset the sales drops that will occur if the economy slows sharply again, or begins to contract.

The question of whether a slowdown has severely damaged corporate revenue will begin to be answered as companies announce third-quarter earnings and offer guidance for the final quarter of the year. Weak numbers would provide another reason to sell stocks after the sharp declines of the past month.

The last sharp market dip took the S&P 500 below 683 in March 2009. If the stocks were to drop that far again, it would be a reset of another 40%. That's unlikely. The sell-off that ended in spring 2009 was relatively rapid, based on the U.S. credit crisis and the realization that the U.S. economy was in its greatest recession in the better part of a century. But the S&P was only below 800 for a quarter, and recovered to that level by April 2009 as investors saw that the banking crisis had ended.

A near-collapse of the credit system with the next recession is unlikely. Banks have buttressed their balance sheets, and most of the largest financial firms say they have only modest exposure to EU sovereign debt. Still, that leaves the current economic slowdown, which is more than enough to drag us into the second dip of a double-dip recession. If it does, stocks have another 25% to fall.

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The markets in general have remained optimistic for nearly two years, contrary to what has unfolded in the general economy. Sooner or later, realization has to set in and it would appear that most of the players are now aware that the finance end has become too detached from the functional side. The consumer is no longer in a position to support a consumer driven economy, government debt worries plague the globe and there have been numerous costly disasters, some which are still in progress. The commodity markets have collapsed, fuel and food have dropped considerably and the midas touch is no looking foolish. While world uncertainty have pushed the entire market system down, food will remain a wild card. I can say with certainty that meat prices wll hold their own and will go higher with the coming year. Corn and soybeans, the staple of many products, will remain and unknown until mid Novermber. I expect the harvest data to reflect much less than is anticipated and another surge in this area. It's like the commercial says "you gotta eat" and there is no alternative.

September 30 2011 at 3:47 PM Report abuse rate up rate down Reply

Stocks are a speculative bubble. This is like Tulip mania, South Sea bubble. Google for "STOCK MARKET KONDRATIEFF WAVE" to understand why.

September 29 2011 at 1:32 PM Report abuse rate up rate down Reply

who comes up with this crap? look at the market today!

September 29 2011 at 10:32 AM Report abuse rate up rate down Reply

The author does not point out the slope of the 200 day moving average of DJIA also just turned negative. In the last 10 years it has never done that without entering a bear market within six months after the downturn.

September 27 2011 at 12:58 PM Report abuse rate up rate down Reply

There will continue to be a number of bumps in the road but remember; the market has improved by 70% since mid 2009. Any one that has invested in that time period has already received a great return.

September 27 2011 at 8:36 AM Report abuse rate up rate down Reply

After what seemed like a lifetime of thirty-Year adjustable-rate mortgages, with monthly mortgage payments going up all the time, The "123 Refi" helped me to lock in a great low fixed rate of 3.16%, helping me to guarantee myself the ability to always make my mortgage payment on time with money to spare.

September 27 2011 at 7:07 AM Report abuse rate up rate down Reply

I think a lot will depend on what happens here.
"German voters are furious over Merkel’s handling of bailouts for Greece and other PIIGS nations. As a result, her party was roundly defeated in a Berlin state election. Her coalition ally lost all its seats.

Now, it seems, Merkel has two choices: She can continue trying to save Greece — by approving new bailouts — or she can try to save her own party and her own career by simply letting Greece default.

No wonder former IMF head Dominique Strauss-Kahn is warning that a Greek default is now inevitable!

“They can’t pay,” Strauss-Kahn said yesterday. “The efforts of European leaders have been too little, or too late, or often both too little and too late.”

And when Greece defaults, your profits could be HUGE:

>> Investors who own the investments that soar when European stocks sink ...

>> That skyrocket when the euro plunges ...

September 27 2011 at 3:51 AM Report abuse rate up rate down Reply

So the question is how far can the stocks fall. Google for "trading stocks market in free fall territory" to understand the danger lurking behind the bubble numbers.

September 26 2011 at 11:11 PM Report abuse rate up rate down Reply
Darrell & Donna

Dont worry;;BERNANKE will put the money press into overtime;;Get rid of the feds;;

September 26 2011 at 7:09 PM Report abuse -1 rate up rate down Reply

We have been spending more than we take for years,our companies are nowdays making more money,manufacturing outside USA,and selling outside....... than in USA....we have become leeches.....we are an old rusty bucket with a bad captain........we will continue until obama is gone or we will sink

September 26 2011 at 6:52 PM Report abuse rate up rate down Reply