The RPF Model and Major Market Events from 1981 to 2009 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 49 NASDAQ Composite Index FIGURE 4.4 NASDAQ January 1999 to May 2002 Source: Yahoo Finance. Figure 4.5 illustrates how the S&P 500 Index did not begin its decline until August 2000. (Remember, the model is applied using actual reported operating earnings, so predicted levels at any point are backward looking and do not reflect expectations.) However, the market began to anticipate that NASDAQ meltdown would have a negative impact on earnings and the index followed. Earnings fell by 27 percent from March 2000 to December 2001. The RPF Model would appear to have effectively signaled the expec- tation that earnings would fall well in advance of the actual reported drop. The implication, then, is that the bubble was created by the combination of inflated earnings levels with rising 10-year Treasury yields that the market was somehow slow to recognize. To the extent the increases in interest rates were orchestrated by the Fed to cool an overheating economy, investors may have misread the signal and expected the increase in interest rates to be temporary. But as the rate increases began to affect earnings, the market began a sharp repricing as the new point of view was assimilated. HOW THE RPF VALUATION MODEL EXPLAINS THE 2008 TO 2009 MELTDOWN AND RECOVERY The bursting housing bubble and mortgage crisis ultimately led to the melt- down that began in September 2008. By August 2008, the S&P 500 had already fallen by 16 percent from its May 2007 peak. During this period, Jan-99 Apr -99 Jul-99 Oct-99 Jan-00 Apr -00 Jul-00 Oct-00 Jan-01 Apr -01 Jul-01 Oct-01 Jan-02 Apr -02