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How low can the stock market go? 4 bear scenarios investors should keep in mind

How low can the stock market go? 4 bear scenarios investors should keep in mind

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Bears who believe the S&P 500 hasn’t bottomed out yet see the major-cap benchmark falling 15% from the current 35%, according to Nicholas Colas, founder of DataTrek Research.

With that in mind, the Wall Street veteran outlined four downside scenarios for investors to consider in Thursday’s announcement:

Both MSCI EAFE index
MFSU22,
-0.01%,
which measures stock market performance in developed markets outside the United States and Canada, and the Emerging Market stock index, which is trading below early 2020 levels, Colas noted.

“If stocks in the ‘rest of the world’ have already given up their pandemic gains, why should US majors be any different,” Colas said.

3,236 – ‘a conservative forecast based on long-term US equity returns

According to Colas, the worst annual growth rate for the S&P 500 in the 20 years since the Great Depression was between 1999 and 2018, at 5.6 percent per year. If this is also a “fair” return assumption for the last five years, note that the S&P 500 closed at 2,465 on September 7, 2017. Using the same return, the S&P 500 would be 3,236.

3000 – “nice round number”.

“3,000 not only fits that bill, it’s right where the S&P closed on September 30, 2019 (2,977),” Colas noted. “That was just before the index rose 14% to its February 2020 peak, so this may be a more accurate representation of the longer-term fair value.”

2,600 – a surprisingly easy target to defend despite being 35% below current levels

Colas noted that historically, the S&P 500 has fallen an average of 25% around a typical U.S. recession, which would put the index’s earnings power at $171 a share. If you calculate a P/E ratio of 15, assuming interest rates stay between 4% and 5% and we pack in stock valuations, the S&P is seen at 2,565, according to Colas.

S&P 500
SPX,
+1.53%
has been volatile this year, with the large-cap index hitting 2022 lows in June and falling into a bear market. The index’s first-half performance was the worst since 1970, but it partially rebounded from a June 16 low, when the S&P 500 ended at 3,667, down 23.6 percent from its peak.

The S&P 500 opened Friday up 1.4% to 4,062. Dow Jones Industrial Average
DJIA,
+1.19%
and the Nasdaq Composite
comp,
+2.11%
increased by 1.2% and 1.9%.

Colas, for his part, noticed a curious thing about predictions of a stock market bottom: “No one seems to buy when they come true.”

Colas argued that the phenomenon actually explains why bottoms form.

“Investors throw away the math because there is always a lower possible price target that seems just as reasonable compared to the current level. Continued volatility is eroding investor confidence to the point that any S&P price target looks possible, he wrote. “Whether you’re bullish or bearish, it’s a critical point to keep in mind in the coming weeks and months.”

Look: The bear market in stocks may have “one more surprise” before it’s over, a chart watcher says

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