By Don Kuehn

"It was the best of times, it was the worst of times ... it was the spring of hope, it was the winter of despair. ..."—Charles Dickens, A Tale of Two Cities

It depends on how you look at it, but today's economy is either very good (like, if you are trying to buy a new home) or very bad (if you are trying to sell one). It may seem like things have really gone into the tank, but in truth, this recession is just another swing of the economic pendulum.

The economic contraction of the past year or so may be more of a return to normalcy than an economic tsunami. The concept is "reversion to the mean," and its results can be seen throughout the marketplace.

Home prices—as bad as they may seem—are still a bit high when measured against what a comparable house would fetch in the rental market. Between 1983 and 1999, most houses were priced at 13 to 15 years' worth of rent. In 2006, that index had zoomed to 25 years. The most recent information I could find has the index now pegged at about 20.

As home prices in many parts of the country continue to skid, the price/rent relationship will come even closer to its historic mean.

The pendulum has swung in employment, too. The historic rate of unemployment in the United States is about 5.6 percent. Not since 1982-83 have we seen the likes of today's 9.5 percent. We also have had periods of very low unemployment (particularly during wartime). In 2000, unemployment was as low as 4 percent.

Employment is a lagging economic indicator. This means that the economy has to recover, inventories have to be depleted, orders for goods must increase and employers have to be pretty sure things have stabilized before they begin hiring again. When they do, expect the number of Americans out of work to decline toward the mean levels we are more accustomed to.

When previous periods of high unemployment ended (1982-83 and 1992) the stock markets were able to put together six-year runs of positive returns.

According to USA Today, "[Personal bankruptcy] filings are surging in part because of rising job losses. The unemployment rate could hit 10 percent this year. And tighter credit, dwindling 401(k) accounts, smaller paychecks and less savings have left unemployed workers and those who are working but struggling, with fewer financial resources to keep creditors at bay."

In the past, consumers were able to stave off bankruptcy by relying on credit cards to get them through. Now that credit has tightened, bankruptcies have gone up dramatically. Last May (latest numbers available), filings reached 6,020 a day, up from 5,854 the month before.

We have seen this bubble/bust phenomenon in other areas of our lives, too. Remember when gasoline was well over $4 a gallon last year? I filled my tank today for $2.46—still high by many measures, but closer to an inflation-adjusted mean.

If you are one of the millions of investors who pulled cash out of the stock markets over the past year because of fears that there was no end to the decline in sight, take heart. The markets are not really that low. In fact, they have moved to just below normal.

For more than a century, the S&P 500 Index traded at a price about 15 times earnings (the price/earnings ratio or P/E). After a severe plunge in stock prices and a contraction in company earnings, the market fell from a P/E of 26 to a level a little below its historic mean at about 12 times earnings. The lower the P/E, the "cheaper" stocks are—a good buying opportunity for those ready to get back into the markets.

According to the Traders Narrative Web site (www.tradersnarrative.com/), "data for February and March 2009 are an estimate only and take us down to 12-which is without an argument a very low P/E ratio. But that's not as low as we've seen the price earnings ratio go.

"In August 1982, the P/E ratio dropped below 7. And in both July 1921and July 1932 it went below 6. To see that scenario again, the S&P 500 would have to drop another 40-50 [percent] to the 430-360 level (assuming earnings miraculously stay the same).
"At its zenith in 1929, the P/E ratio was only approaching 33 while in 2000 the market top it reached 44."

Going back to 1926, nine of the 12 worst 10-year periods for the S&P 500 index were followed by 10-year periods in which investors made an average return of 10.75 percent a year, according to money manager and market researcher James O'Shaughnessy.
As I said, this could be a very good time to get back into stocks.

Remember the tech bubble in 2001? When it burst, stocks tumbled—then rebounded. Commodities have fallen, gold and silver are down from their peak prices, and personal consumption is down. In short, the pendulum swings both ways.

The economy moves in cycles. What goes up comes down. What has been down rebounds. The important thing, I think, is to keep an eye on the mean, or average. Figures that stray far from their averages (either way) tend to come back to reality sooner or later—sometimes with a soft landing, other times with a thud.

So the point is to be aware of these "bubbles" in the economy. When pundits try to explain a big run-up in stocks, for example, or in the price of gasoline or any other commodity by saying that "it's different this time ..." take it with a grain of salt. It probably isn't. We've been there before. So when things are bleak, don't get too distraught.

Your personal economy may be in the tank right now, but remember the notion of reversion to the mean. Time and patience will help you return to normal. In the meantime, take advantage of the opportunities that the depressed markets present. It's your money. Make the best of it.

Don Kuehn is a retired AFT senior national representative. For specific advice relative to your personal situation, consult competent legal, tax or financial counsel. Comments and questions can be sent to dkuehn60@yahoo.com.