If It Ain't the Next Depression, It's Time to Buy
By Dr. Steve Sjuggerud
October 7, 2008

As long as we're not heading into the Next Great Depression... it's time to buy stocks.

That's the message I got from studying 150 years of stock-market data this week...

I can't know the future, of course. But I do know in the last 70 years, the stock market has turned in a worse 12-month performance (if October closes at today's levels) only once. That came toward the end of the horrendous bear market of 1973-74.

But after stocks fell 41% in 12 months... they were up 32% a year later.

It turns out this is the rule, not the exception... When stocks have a terrible 12 months, they typically have a good 12 months after that. Take a look:

Looking farther back (150 years), the pattern continues:

The only times you didn't make double-digit positive returns 12 months after a major fall were after the dot-com bust and in the Great Depression.

In those two cases, you were starting from record-high valuations. A big difference today is, stocks are cheap.

So, yes, the stock market has just experienced its second-worst 12-month fall in the last 70 years (again, if it closes this month at today's levels). But generally when this happens, it's time to buy, not time to sell.

(An important note here... All of this data is from the worst 12-month period in a bear market. We may not have seen the worst 12-month period in this bear yet. We can't know.)

The point is, you'd have made solid double-digit returns every time going back 150 years, except twice... after 1929 and after 2000. In both those cases, stocks were so overpriced, they were still expensive even after their 12-month fall. In short, they had farther to fall.

The biggest gains, of course, were made when stocks were the cheapest after a fall. By 1932, stocks were darn cheap, at a P/E of 5.6. Stocks rose 118% in the next 12 months.

More recently, stocks were extremely cheap in 1982 after a big 12-month fall. They were at a P/E of 7.4. Sure enough, they rose 52% in the next 12 months.

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So are stocks cheap or expensive now? Stocks are cheaper today than they've been in over 20 years. (The forward P/E of the S&P 500 is about 12.3.)

We're missing the uptrend, so I can't recommend buying just yet. (It could arrive tomorrow... Or it could take years.) But history suggests stocks will be higher by double digits 12 months from now...

Good investing,

Editor's note: Steve Sjuggerud is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.

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When a hedge-fund manager loses a ton of investor capital, it receives a ton of requests to return what's left of that capital to clients. These requests are called "redemptions."

Redemptions are flooding hedge funds right now... and they're proving catastrophic to a trade most funds have loved for a long time. That trade is "long commodities on leverage."

For a picture of this catastrophe, we present the gruesome chart of Suncor Energy. Suncor is at the epicenter of the "long commodity" trade. It's one of the largest players in the Canadian oil sands. When a huge hedge fund wants to get long energy, it often chooses Suncor.

As you can see, Suncor has declined from a peak near $70 per share to around $28 per share... a decline of 60% in just four months. This is an unnatural decline. It's also a sign big hedge funds are going under and facing massive redemption requests... which leads to selling and lower prices... which leads to more redemption requests... which leads to... you get the idea.