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Dow at 1989 levels, Amazon at $4: What a 1929-style crash would look like today

MarketWatch logo MarketWatch 5 days ago Shawn Langlois

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Video by CNBC

Much has been made lately about how the CAPE ratio — a popular valuation measure applied to the S&P 500 (SPX) — has ballooned to levels not seen since the dot-com bubble, and before that, all the way back to 1929.

CAPE stands for cyclically adjusted price-to-earnings. It’s also known as the Shiller P/E ratio, named for the Yale professor who created it. While the metric has its share of critics, it’s still considered a standard measurement of market valuation.

Aside from where it stands today, it’s safe to say that only twice before have we seen the CAPE ratio top 30. Both times, the bottom fell out of the market, as you can seen from this chart posted by Michael Batnick of the Irrelevant Investor blog:

© Provided by Dow Jones & Company, Inc.

In his blog post, Batnick focused on comparisons to the Great Depression rather than the aberration of the late 1990s. He pointed out that, in the 10 years leading up to 1929, the CAPE ratio went from a low of 5.02 all the way up to 32.56.

He cited a Ben Graham article from 1932 in which the legendary investor said, “More than one industrial company in three selling for less than its net current assets, with a large number quoted at less than their unencumbered cash.”

In other words, several businesses were worth more dead than alive.

Of course, it would have to get almost incomprehensibly nasty for companies these days to be selling for less than their net current assets.

“Honestly, for the market to fall 90%, I’m thinking aliens, an asteroid, or another world war seem the most likely culprits,” Batnick said. In any case, this is what the Dow (DJIA) would look like if we were to have a 1929 redux:

© Provided by Dow Jones & Company, Inc.

A Great Depression-esque crash would destroy 28 years of gains and take the blue-chip index all the way back to where it was in May, 1989, Batnick wrote.

Yet there IS a silver lining, no matter how far-fetched it might seem. Those who manage to keep powder dry by stashing cash could very well emerge as big winners, much like those savvy investors sifting through the wreckage after 1929.

Batnick used Amazon (AMZN) as an example of what a 21st century bargain would look like if things got really ugly.

“Amazon’s net current assets are $2.061 billion. If you could purchase Amazon for this price, each share would cost you $4.29, down from the $994 its currently trading at; a cool 99.57% discount,” he wrote in his blog post. “This sounds absurd and unimaginable. The latter it is, the former it is not.”

Like Batnick said, it’s not as unimaginable as it sounds.

In October of 2008, Charles Schwab (SCHW) had a market cap of $28.8 billion while holding $27.8 billion in cash. At the time, there were 875 other stocks trading below the value of their per-share holdings.

“U.S. stocks have a valuation that is in line with two of the biggest market peaks of all-time, so if this is 1929, it will be a nightmare for this generation, and a gift for future ones,” he wrote. “And while I can’t imagine a scenario that takes us to Dow 2,400... Dow 15,000, a 32% decline, seems well within the realm of possibility.”

Shawn Langlois is an editor and writer for MarketWatch in Los Angeles. Follow him on Twitter @slangwise.

Traders working on Wall Street, in New York. October 1929. © Provided by Dow Jones & Company, Inc. Traders working on Wall Street, in New York. October 1929.
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