Financial Crisis Therapy

With all of the media attention on the disastrous state of the financial markets and the relentless comparisons to the Great Depression, it is easy to think that the world as we know is coming to an end.  While I cannot pretend to say that we are not in the midst of a severe financial crisis that will take a long time (years, not months) to correct, I do think it is worth pointing out that there are some good reasons to keep an optimistic eye on the markets and the economy at large.   With that in mind, here are a few facts to help cheer you up:

• Corporate balance sheets are much healthier than in previous downturns.  The Fed reported that corporations held $14 trillion in cash & equivalents on their balance sheets at the end of Q2
• Inflation pressures are significantly decreasing – due to sharp declines in oil and commodity prices since their peak in early Q3
• Housing affordability is back to 1990/91 levels
• Exports remain relatively strong, unlike in previous economic downturns (but will this continue as our financial plague spreads to EU and Asian markets?)
• Forward P/E ratio for the S&P 500 is ~12x, while the 40-year average is 18x
• Rampant fear in the markets typically creates buying opportunities (see how active Warren Buffett has been recently?)
• Peaks in negative investor sentiment marked the market bottoms of 1987, 1998 and 2002
• High volatility also typically accompanies market bottoms.  The VIX Index (measures S&P 500 volatility) hit a reading of 58 yesterday – its highest ever.  The last four times the VIX went over 40, the market rebounded by an average of 15% during the following three months

While I am in no way proclaiming that we have reached the bottom or that the pain is over, I do think that it’s prudent to maintain a balanced view and be on the lookout for buying opportunities.  On that note – Google closed at its lowest price since March of 2006 today… just an FYI.