Dividends are being cut across the board. There are no signs of economic recovery. There is almost universal stock market gloom. They are sure signs we're close to the bottom of the market.
1. Share prices not being hammered on bad news
This week, life insurance company and FTSE 100 constituent Old Mutual (LSE: OML) announced a plunge in profits and a scrapping of its dividend
In previous weeks and months, such results would have lead to the shares being hammered, perhaps by as much as 10% or 20%.
Old Mutual shares actually rose 11% in early trading after their results. Whist the results were poor, the market was relieved the company have said they don't need to raise extra money.
It's a sign we're close to the bottom of the market. Most of the bad news is already priced into individual share prices.
2. The shambles of an economy
You know things are bad when master investor Warren Buffett says "…the economy will be a shambles throughout 2009 – and for that matter, probably well beyond…"
In his annual letter to shareholders, Buffett was taking about the US economy, but he could have easily been talking about any economy in the world. Only China seems to have avoided recession, but even still, with the growth rate in that country having slowed considerably, it feels like they are in recession too.
Here in the UK, we've got stories of people delaying retirement, unemployment continuing to rise, the banking sector in disarray, house prices in freefall, and all this despite interest rates and mortgage rates at record lows.
Recessions are dark and scary. Even Gordon Ramsay's company is rumoured to be in trouble, for @#%*'s sake!
As individuals, we forget what a healthy economy looks like. Using our most recent experiences of the economy, we assume only bad things will continue to happen in the years ahead. We forget that recovery has followed every recession to date, and recovery will follow this one.
The market usually rises six to nine months before the economy shows signs of recovery. If you think we are going to see signs of economic recovery towards the end of this year, it's a sign we're not far away from the bottom of the market.
3. Almost universal stock market gloom
The FTSE 100 recently hit a 6-year low, at one stage dropping below 3,500. Around that time, in the article What's Next? FTSE 3,000?, I asked readers to vote in a poll, asking the question "How low can the market go?"
Of the almost 300 people who voted, almost 90% thought the market would fall at least another 10%.
50% of them thought the FTSE 100 would fall below 3,000, and 22% thought the FTSE 100 would fall below 2,500.
You can't get more downbeat that that.
This fascinating thread on the Motley Fool’s popular Paulypilot's Pub discussion board features the thoughts of some of our most respected and prolific posters.
It started off by posing the question "Is it too late to sell?" and covered thoughts about investor capitulation, widely acknowledged to happen right at the very bottom of the market, the eroding value of cash, the death of the long-term-buy-and-hold strategy, the bottoming of commodities, and some good old fashioned praying.
Perversely, it's exactly at times of universal gloom that you can be sure we are close to the bottom of the market. We may not be there yet, but I'd wager we're much closer to the bottom than to the top.
4. Shares are cheap
As I said recently, the mad market got it wrong again with BP (LSE: BP). At their recent share price of 404p, BP shares traded on a dividend yield of 9.4%.
Now I ask you…in times of ultra low-interest rates, where money deposited in a "high" interest savings account earns you around 3% interest per annum, why wouldn't you invest your money in companies like BP?
It must be fear. Fear of losing more capital, fear of a three to five year recession, fear of oil prices permanently at $30, or simply fear of fear itself.
There are no sure things in investing, and there is risk in each and every investment. BP's dividend could be cut. The oil price could languish for a considerable period of time. Gordon Brown may win the next election. They are all risks.
But the shares of BP, and countless other companies, including smaller companies like IG Group (LSE: IGG), RPS Group (LSE: RPS), Consort Medical (LSE: CSRT), London Capital (LSE: LCG) and Chloride Group (LSE: CHLD) appear cheap.
And as well all know, buying cheap and selling dear is what stock market investing is all about! Cheap shares are other sign we’re close to the bottom of the market.
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> Bruce Jackson does not have an interest in any of the companies mentioned in this article.
