Earnings data even more bearish - when will markets have this fully discounted?

Corporate earnings are down, so their stock prices are down. Simple enough! Many are looking at price-earnings (p/e) ratios trying to figure out whether the market is still over-priced. The S&P hit 666.70 in March, and it cannot be just because of that number sparking so many conspiracy theories and numerology analyses, that people have been feeling very bearish. There's actual data showing that stock-issuing companies are not doing well! Here's the weekly missive from "Chart of the Day" - but before reading it, I want to remind and emphasize to everyone that (1) we are relying on their crunching of these numbers; and (2) this chart displays "REAL", "inflation-adjusted" numbers. That makes a HUGE difference! since the markets that we see every day are pricing in nominal and not real dollars. We do not know what formula they are using to make the inflation adjustments.

Sure, earnings have plunged in the past year. The dollar has also plunged, including with one big wave down since 2000. So if this chart were re-cast non-adjusted dollars, it would look very different. Still bearish, I grant that, but not like they present below.

Frankly, I would like to see this type of chart presented using nominal dollars for once ... because displaying it this way, tends to inflame more bearishness than we probably need right now. And if you believe that the stock market leads the news, then you have to remembe that the market will bottom before the news improves. Still, it would be interesting to see these numbers crunched into a chart of p/e ratios ... but I digress. Let's take a look at what Chart of the Day is talking about right now:

Chart of the Day
While the stock market is up sharply since early March, the economy as well as corporate earnings continue to suffer. Today's chart helps provide some perspective as to the magnitude of the current economic decline. 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.

Webmasters, journalists, and bloggers may post an occasional free Chart of the Day on their website as long as the chart is unedited and full credit is given with a live link to Chart of the Day at http://www.chartoftheday.com.

Is it just me, or are the charts circulated by "Chart Of The Day" always scary looking?! I hope by now that my readers understand, we look at this type of economic data to help put the markets into context. It doesn't tell us whether the market is likely to go up or down tomorrow, or next week, or next month. And of course, the data above are in "REAL" (inflation-adjusted) dollars. On the other hand, negative is negative, whether or not adjusted for inflation. But that's based on "estimates" and what are they worth especially nowadays?

So it's fascinating to know and sheds light for anyone who didn't already figure out the markets have been in trouble. One thing we might remember is, that if and when the markets have fully discounted such terrible information, and things start to turn around, we want to be correctly positioned.

I'm noodling around some long-term chart alternatives at my UBTNB3 blogspot. I am aware that some people are saying that we need to put news like this behind us, and that a grand new supercycle bull market has already started. I'm not very convinced of that. But, to size up those possibilities, it's easy to look at some key levels. For example, the highs of last week (I'm referring to the highs of the week prior to the week we just completed) in the equity markets. And also, whether the dollar will bottom perhaps in the range 79.88 or slightly above, and the euro and gold both roll over and move lower. These are some criteria we'll keep a close eye on to size up whether or not the market has finished discounting dour news like the chart above.