According to JPMorgan, the fall in both developed and emerging equity markets of close to 20% since last October already closely matches the average fall of 21% in the previous 10 recessions.
To some extent the fall has been so great that equities are already looking cheap. Historically, the bank points out, P/E ratios have tended to peak at a 10% premium to recent trading ranges at the onset of slowing growth. Before the current market fall, however, equity P/E ratios actually peaked at a 20% discount to recent trading ranges.
Although some might argue that the cheap valuations are based on overly optimistic forecasts of earnings growth, even a 10% fall in earnings growth would still leave European corporate 2008 P/E ratios of just 14, only slightly above their long-term ex-bubble average of 13.4.
Thats not to say that the market has no further to fall, as no positive catalysts are yet in sight.
"Market bottoms have little to do with earnings," says Ian Scott, global equity strategist at Lehman Brothers. "The trough for earnings normally comes way after the onset of recession so its not a good idea to look to earnings to call the bottom of the market. But if we look at the factors that typically determine the depth and length of a market sell-off, we can say that the interest rate environment and the low valuations at the outset of the current economic slowdown suggest that it is unlikely to be as deep or as long-lasting as previous cycles such as 2001 or 1973, when markets nearly halved coming into recession. We dont see much downside at current levels."
Senior US company executives evidently agree. According to Washington Service, a company that tracks legitimate insider share trading flows, senior company executives and directors bought over 40% more shares than they sold in January, the first time that this has happened in 13 years. Net buying by company insiders has typically been a strong indicator that the market will rise in the next year. Insider purchases by senior executives and directors totalled $683 million last month, while sales were $475 million.
Concerns about growth, inflation and corporate earnings are likely to get worse before they get better, but analysts are hopeful that the Federal Reserves aggressive interest rate cuts will soften the landing and lead to a bottoming in macro momentum indicators by the middle of the year.