Why the S&P 500 should fall another 10% to 20%.

The risk of being so right in one’s projections (I called this meltdown months ago) is you begin to second guess yourself – maybe now I should turn bullish? The recent rally (which I covered in my “It’s a Trap” post) had me doing just that! But my rational (more experienced) self refuses to budge from what I know must happen before any sort of ‘recovery’ can take place.  Here’s a quote from an earlier post (March 24) entitled S&P 500 closes below my -35% target:

If we expect 10% lower corporate earnings for this year (and estimates may be even worse when capitulation truly sets in), then the downside risk to the S&P 500 is closer to 2,250 – the long-term average P/E (15X) times roughly $150 earnings for the index.  This would imply a decline of about 35% from the market high. 

I was inspired to write this update by one of the experts appearing on CNBC.  I’m paraphrasing, but he suggested that if we have a decent recovery in 2021 then the current valuation (close to 2800 for the S&P 500 at the time) is about right.  My immediate thought was ‘WHAT?’


The stock market, as in almost every crisis I’ve suffered through, needs FIRST to trade on one year earnings, which is about as wide a range of possibilities right now as one can imagine.  However the confidence level of one year is still much greater that it is for two years away.

It’s looking like 10% lower earnings for the current year is just too optimistic (fallout from devastated oil pricing, industry lock-downs, unemployment at record levels and consumer confidence nosediving).  If corporate earnings fall 20% (at least as realistic as 10% and could also be worse) then index earnings of a paltry 132 for 2020 would imply a target range – based on what you think the P/E ratio should be – of 2640 or -3% to -4% from today’s level assuming a 20X multiple, or downside risk to 1980 which assumes a 15X multiple; down almost another 30% from current levels. It seems that 20X earnings (despite low interest rates) is a bit aggressive when the probability of no growth for 2021 in non-trivial.

cards picWhy does any of this matter?  As I’ve mentioned in prior articles, I want to know when I believe it would be smart to ‘dive  in.’

I’ve covered sectors which I believed were safe enough to be invested in – for example grocery stores  back on March 3rd or gold on Feb. 3rd; and which to avoid, such as energy.  But I’d also like to go all in at some stage.  I can’t pretend to time it perfectly, but I want to be sure to at least try and minimize the pain of diving in far too early.

Since the exercise presents a wide range of possible outcomes, I’ll keep it simple and split the difference.  Should the S&P 500 get close to the 2300 level (and it should) I’m ALL IN! This would be a further decline of about 16%.  It could still go much lower, but over a 2 to 3 year time horizon should work out well indeed.






About Mal Spooner

Malvin Spooner is a veteran money manager, former CEO of award-winning investment fund management boutique he founded. He authored A Maverick Investor's Guidebook which blends his experience touring across the heartland in the United States with valuable investing tips and stories. He has been quoted and published for many years in business journals, newspapers and has been featured on many television programs over his career. An avid motorcycle enthusiast, and known across Canada as a part-time musician performing rock ‘n’ roll for charity, Mal is known for his candour and non-traditional (‘maverick’) thinking when discussing financial markets. His previous book published by Insomniac Press — Resources Rock: How to Invest in the Next Global Boom in Natural Resources which he authored with Pamela Clark — predicted the resources boom back in early 2004.
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2 Responses to Why the S&P 500 should fall another 10% to 20%.

  1. Bull Beta says:

    Always really enjoying your articles! I am totally with you a major sell-off is on its way soon before return to normality

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