As the market has dropped over the last six month, the lower prices have resulted in lower P/E ratios for many companies, even in the face of lower earnings (see WSJ article). While earnings could continue to fall, lower prices are currently offering value investors more opportunities than they may have had in the past as once high-flying technology, energy, health care, and bio-tech companies are now looking attractive. Many of these same stocks were sold-off as hedge funds were forced to liquidate positions in the wake of increased redemption requests. The fact that now both growth and value managers are looking at some of the same companies could produce an increase in buying pressure and stock price appreciation in the short-term for growth companies that were previously widely held.
Consumer spending fell 1 percent last month, while the savings rate rose 2.8 to 3.6 percent (see Washington Post article). Given that consumers have less revenue streams than before - employment (still for most), but less bonuses, dividends, capital gains, and home equity cash - it makes sense that they are saving what income they are receiving, just in case job losses hit their family, or the recession deepens or becomes prolonged. While the benefits of lower energy cost are helping, memories of $4 gas are also still in the minds of consumers. This of course continues to be bad news for consumer retail, and continues to help separate the wheat from the chaff as companies such as Circuit City and Linens 'n Things can no longer take the slowdown, and subsequent lack of sales and profits. I suspect that as we continue to keep hearing about how this is going to be an extended recession and even longer recovery, consumers will do their part to insure that it is indeed long as they reduce spending and save what disposable income they have. Ironically, it may be this prudent saving that helps keep the housing and stock market ATMs that consumers have depended on short of cash for quite a while.