The most respected valuation methods available
suggest the current market downturn could very likely end with the S&P-500
in the range of 1500 to 2000. The equivalent Dow values would be around 14,000 to
18,000.
However, that range would be the long term
"median" or "average" value. Looking at previous
downturns such as the 2007-2009 crash, the S&P500 could overshoot down
as low as 1130 (or Dow at 12,000) to reach a bottom before rising again.
The economy is in a worse recession than the 2007-2012 with unemployment rising to 15% and taking a long time to recover.
Market downturns can take over three years to
go from top to bottom with lots of 'rallies' in between. The
"Housing Bubble" crash of 2007-2009 took a relatively short 17 months
with at least 6 rallies along the way - 3 rallies of more than a month.
The U.S. markets are in a "rally"
retracing 50% of the previous drop. That is a standard type of rally in a
bear market – 50% “retracement” is the norm. While nothing is certain, it
is hard to believe it will persist with the widespread economic devastation
that is already starting to manifest.
According to the President of the Wells-Fargo
Investment Institute, since 1929, there have been 13 "waterfall"
market crashes like the one in March. Each one was followed by a 50%
"rally" (i.e., a retracement of lost value). Every single one of those rallies failed and the downward trend resumed.
One estimate of market value is the Shiller
CAPE Index. Dr. Robert Shiller of Yale University won the 2013 Nobel
Prize in Economics for his work in 'Asset Valuation'. The Shiller CAPE ratio is
currently (18/6) at 29.1 but the historical mean is at 17.1. For the
ratio to get to its historic mean it would need to drop about 41% from current
levels. Further, the CAPE ratio overshoots both ways. In 2000 it
overshot to the high side to hit 44, and in 1982 it overshot to the low at
around 7.
With the S&P 500 currently at 3113, to
achieve the median Shiller P/E value, the market would need to drop to 1829
to reach the median value of 17.1.
Warren Buffett popularized a way of determining if
the broader stock market is over- or under-valued using the TMC of all stocks
divided by the GDP (Gross Domestic Product = all goods and services in the US
economy).
Buffett Indicator =
TMC/GDP
The chart below shows GDP in green,
Total Market Cap in blue. When the TMC is above the GDP the stock market
is expensive by Buffet's criterion.
The market has been mostly undervalued or
overvalued according to Buffett's indicator. Please note that by this
criterion, the market was extraordinarily overvalued in January 2020 at
150%, even more overvalued than the 140% reached in the Dot-Com Bubble of
2000.
Nothing is certain, especially with the CoVid-19
virus mutating, potential vaccines, and other unknowns affecting things.
It does seem that the market was unusually over-valued in 2018-2019 and was
overdue for a "correction". That "correction" seems
to have a while to go both in time and distance.
[Nothing suggested here is investment advice or a recommendation
to buy or sell securities of any form in any markets]
Reference:
Stock Market Collapse, An Avalanche Waiting to Happen, (http://meetingthetwain.blogspot.com/2020/04/crash-2020-wheres-bottom.html)
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