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

Bears who reckon the S&P 500 hasn’t yet found its bottom see the large-cap benchmark falling 15% to 35% from current levels, according to DataTrek Research co-founder Nicholas Colas.

With that in mind, the Wall Street veteran, in a Thursday note, outlined four downside scenarios that investors should consider:

3,386 – ‘the last pre-pandemic high for the S&P 500

Both the MSCI EAFE Index
MFSU22,
-0.01%
,
which measures the equity market performance of developed markets outside of the U.S. and Canada, and the Emerging Market equity index, traded below their early 2020 levels, Colas noted.

“If ‘rest of world’ stocks have already given up their pandemic gains, why should U.S. large caps be any different,” Colas said.

3,236 – ‘a conservative projection based on longer-run US equity returns

The worst 20-year compounded annual growth rate for the S&P 500 since the Great Depression was the period from 1999 to 2018, at 5.6% annually, according to Colas. If that is also a “fair” return assumption for the last five years, then note that S&P 500 closed at 2,465 on Sept. 7, 2017. Applying the same return would see the S&P 500 at 3,236. 

3,000 – a ‘nice round number

“Not only does 3,000 fit that bill but is also just about where the S&P closed on September 30, 2019 (2,977),” Colas noted. “That was just before the index rallied 14% into the February 2020 highs, so this may be a more accurate representation of longer run fair value.“

2,600 – ‘a surprisingly easy target to defend even if it is 35% below current levels

Historically, the S&P 500 has fallen an average of 25% around a typical U.S. recession, Colas noted, which would put the index’s earnings power value at $171 per share. Put a P/E ratio of 15 on that, while assuming interest rates stays between 4% to 5%, and compress equity valuations, the S&P is seen at 2,565, according to Colas.

The S&P 500
SPX,
+1.53%

has been volatile this year with the large-cap index hitting its lowest levels of 2022 in June and falling into a bear market. The index had its worst first-half performance since 1970, but saw a partial bounce off its June 16 low where the S&P 500 closed at 3,667, down 23.6 percent from its peak. 

The S&P 500 opened 1.4% higher at 4,062 on Friday. The Dow Jones Industrial Average
DJIA,
+1.19%

and the Nasdaq Composite
COMP,
+2.11%

gained 1.2% and 1.9%, respectively.

Colas, meanwhile, observed a peculiar thing about forecasts for stock-market bottoms: “no one seems to buy when they come to pass.”

Colas argued that the phenomenon, in fact, explains why bottoms occur.

“Investors throw the math away because there’s always a lower possible price target that seems equally justifiable versus current levels. Persistent volatility crushes investor confidence such that any S&P price target seems possible,” he wrote. “Regardless of whether you are bullish or bearish, that is a critical point to keep in mind in the weeks and months ahead.”

See: Bear market for stocks may have ‘one more surprise’ before it’s over, says chart watcher

Source: https://www.marketwatch.com/story/how-low-can-the-stock-market-go-4-bear-scenarios-investors-should-keep-in-mind-11662672914?siteid=yhoof2&yptr=yahoo