NYU's 'Dr. Doom' Roubini: Stocks may fall another 20% during recession Posted Dec 22nd 2008 6:33PM by Joseph Lazzaro Filed under: Forecasts, Indices, S and P 500, Recession
Nouriel Roubini, the once obscure New York University economics professor who two years ago predicted the current global financial crisis and recession, said those who are turning bullish on the U.S. stock market need to reassess the data. Roubini told Bloomberg News he was "still quite bearish on U.S. and global equities." Despite losing much of their value already, Roubini thinks they could still lose another 15-20% before any recovery beginning towards the end of 2009. Caveat emptor: let the (stock) buyer beware The S&P 500 has fallen more than 40% in 2008, and with a forward P/E of about 12, one could make the case that stocks are at least approaching cheap levels, based on the post-World War II P/E average of about 17. Economist Richard Felson is not of that camp. "Cheap compared to what? Compared to bull market high P/Es of 25 or 26, yes, but that assumes a) a return to GDP growth levels experienced before the recession hit; and b) that stocks won't drop to lower levels. You can't assume either, so Roubini's downside forecast may represent 'discretion being the better part of valor'," Felson said. "This is a risky time to own stocks or increase positions. Stocks could become much cheaper, particularly if the recession lasts into Q3 2009." Further, history supports Felson's and Roubini's interpretation of the market's value. During bear markets, which usually accompany recessions, the forward P/E can dip much lower, to even 10. (You don't want to know what the forward P/E fell to during the Great Depression.) Then there's the Washington factor, Felson noted. Historically, improved regulations have meant tougher revenue and earnings growth conditions -- a political reality that argues not against a return to adequate GDP growth, but against a return to giddy P/E multiples. Market Analysis: Economist Roubini certainly is not one to add to euphoria. Still, a critical review argues that looking at a company's P/E is not nearly enough. Investors need to evaluate its prospects for revenue and earnings growth juxtaposed against the outlook for the U.S. economy (and of course, credit market conditions). If too many 'optimistic' conditions have to line up, that company's revenue and earnings targets may be unreasonable, and that cheap stock may get much cheaper.
