My back-of-the-envelope approach has proved robust over decades of managing institutional portfolios. In an earlier post is suggested the downside was at least 10% but having another look I am more bearish. Why? I believe a multiple revision will occur due primarily to news on the inflation front of late. Watching CNBC, I heard a market pundit suggest that a 20x P/E for the index was reasonable given the low level of interest rates.
However, as markets tend to look ahead (eventually anyway) I believe the longer term average of 15X is more apt in what is becoming the bear market I’ve been predicting for over a month now.
Consensus estimates for 2019 earnings corresponding to the S&P 500 are in the neighborhood of $165. I expect growth to slow to about 5% so I’ll predict (not a good word but can’t think of another) about $173 for 2020 (no point using decimal places, it’s a ‘prediction’ prone to error). At 15X that puts the S&P 500 at near 2600. In other words, the downside from current levels is about -17%. UGLY!
Of course, it might not be this bad, or it could be worse. The contagion (COVID-19) is spreading which is causing considerable panic even if much of it becomes irrational. My strategy in times like these (which has always been successful) is keep a level head and pay attention to the numbers. As I did after the October ’87 Crash, I’d pick my point and start buying aggressively. So, should the Index get close to 2600 I’d be in there like a dirty shirt.
In the meantime I’d hold onto the stocks that are already beaten up (not much downside) and when the time is right buy those stocks that have been hit the hardest by the panic selling. Works every time. This formula is how you manage to have the #1 fund on the rare occasions.
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