About That Crashing Stock Market

A reader was kind enough to ask me to comment on the market, so here goes:

I don't know whether this is a "correction in a bull market" or the "start of a bear market," although I am far more persuaded by the latter case.  After ten years on Wall Street, however, I can promise you this: No one else knows either.  Go ahead and listen to the parade of smart guests on Bubblevision--their logic ranges from impeccable to hilarious--but just don't let yourself get seduced into betting big one way or another.  Because no one knows.  (We have 50/50 odds, though, so half of us will be "right").

One thing we do know: Based on correctly calculated long-term valuation trends (cyclically adjusted P/E), the stock market is still extremely expensive (close to the peak levels of 1929, 1966, and 1987, and only below the all-time peak of 2000).  I expect that this situation will eventually revert to the mean, which is why I think that we will eventually see the "start of a bear market" that could take us below the 7700 trough on the DOW in 2002--and this could well be it.  Unfortunately, long-term valuation trends are useless for near-term timing calls.

Why is this relevant for Silicon Alley?  Because the direction of the stock market is important for those who run companies, whether it seems so or not.  Crashing markets often herald crashing economies, which lead to reduced consumer spending and advertising revenue.  And crashing markets also throw buckets of cold water in the face of those who were just gleefully distributing angel and VC cash. 

I've spelled this out in more detail in the second post below, which includes a handy guide laying out the assumptions you should make about how bad it could get.  And don't forget to blame the Google guys: it was their Q2 that started it. :)

Google Blows Up the Stock Market
The Market's Crashing: Are You Recession-Proof?