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The 2008 Stock Market Crash – Irrational Despondence? October 9, 2008

Posted by DustinRJay in Calgary real estate.
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Since the S&P 500 peaked in 2007, the stock market has plummeted a whopping 42% from the peak.  The dot-com bubble deflated over several years, whereas the United States housing bubble has collapsed over a much shorter time period and has brought down with it the American banking system.  Fear has run amuck, and the question is, has rational thought regarding value given way to irrational fears regarding market risks?

If one believes that the market is a somewhat random geometric series of cash flows that resembles exponential growth, then one should be able to identify peaks and troughs in the market by defining an “upper peak” and “lower trough” line.

The recent bear stock market has easily broken through the previous “lower trough” line and therefore savvy investors may now find substantial value in good stocks that have solid balance sheets and dividends that pay above safe investments like bonds.  The following graph shows the S&P 500 and the upper and lower trading bands:

How does this relate to Calgary real estate?  Bear markets such as the 1987 stock market crash did not have an impact on Calgary real estate prices and there has been virtually no correlation between Calgary real estate prices and the S&P 500.

There is likely a stronger linkage between the S&P/TSX Capped Energy Index and Calgary real estate prices.  Overall, the slumping stock prices in this sector will likely result in less money available for capital expenditures, and less shareholders cashing out.  In turn, this may result in less demand for high end real estate in Calgary over the next 12 months.

I believe that in the energy sector in particular, one can find substantial value through scouring balance sheets for price to earnings ratios, price to book value ratios and dividend yields.  The most recent CIBC World Markets Canadian Portfolio Strategy Outlook makes the argument that TSX stocks are at the cheapest since 1987, and furthermore that energy stocks will provide the most upside over the next year.

Full Disclosure: I have positions in Calgary real estate and corporations that are components of the S&P/TSX Capped Energy Index