How low can stocks go?

Is there a floor on the stock market and, if so, where is it?

A lot of times when you read about individual stocks and the stock market, the writer or commentator talks about price rises as though they're permanent.

"If you didn't buy XYZ at $20, you've lost out on its rise to $50." Maybe. Or maybe it will go to $10 by next year. Or $1.

People commenting on Alan Abelson of BARRON'S often sound like that, because he's a chronic bear. "He would have had us miss all market gains since the Dow was 3200," one woman wrote in. In their book RULE BREAKERS, RULE MAKERS, The Motley Fool also go after Abelson.

Now in 2007 we can see perhaps some truth on both sides. The late 1990s were an unsustainable boom which did bust. Starting in March 2000, The price of many dot.com stocks plummetted from hundreds of dollars to pennies. High tech companies that made a profit, such as Microsoft, saw their share prices dramatically reduced. The overall market went down, although not by as much.

However, bad as the early 2000s bear market was, it wasn't as bad as some of Abelson's predictions. People who bought stocks at a price below their bear market lows, remained "in profit" -- at least without adjusting for inflation.

Is that a guarantee that the market or individual stocks will never go below the early 2000s bear market lows?

No. The Dow is now about 12,500. Maybe it will go back 777 where it was in 1982. Maybe below that, wiping out all price gains made in this long term bull market.

Maybe it will never go below 12,500 again.

Nobody knows.

And that's my point. It's easy to point to stock charts from the past, compare them with today's prices and then draw conclusions. But nobody knows where those prices are going tomorrow or in the next 5 or 10 or 30 years.

It's not likely the Dow will ever go back to 777 -- but I wouldn't risk my life on it, especially not with terrorism, looming conflict with China, and such threats. The U.S. has survived past threats -- that's no guarantee of the future.

Advocates of "value investing" often speak of how stocks can be undervalued now but the market will reward good companies in the "long run." I've got news for you -- there is no "long run." Stock prices are ALWAYS fluctuating.

Many companies traded on the New York Stock Exchange are more than 30 years old. Their prices continue to fluctuate based on the market's current appraisal of their value. 30 years from now, the stock prices of all then-existing companies will also fluctuate based on the market's then-current appraisal of their value.

And those 30 years from now prices could be considered "over" or "under" valued at the time, depending on how you choose to value a stock.

And those 30 years from now prices could be higher but also lower than today's closing price -- without or without adjusting for inflation (which is important, but it's easy to forget about this when oohing and ahhing about how much a stock has gone up over the years.)


stock price lows
stock price lows