{"id":1122219,"date":"2019-06-18T13:12:32","date_gmt":"2019-06-18T13:12:32","guid":{"rendered":"https:\/\/dailyreckoning.com\/?p=107536"},"modified":"2019-06-18T13:12:32","modified_gmt":"2019-06-18T13:12:32","slug":"revealed-how-far-stocks-will-fall","status":"publish","type":"post","link":"https:\/\/juniorminingnews.com\/?p=1122219","title":{"rendered":"REVEALED: How Far Stocks Will Fall"},"content":{"rendered":"

This post REVEALED: How Far Stocks Will Fall<\/a> appeared first on Daily Reckoning<\/a>.<\/p>\n

How far might markets plunge next time around?<\/p>\n

And will you be able to recover your losses rapidly?<\/p>\n

Answers \u2014 possibilities, rather \u2014 shortly.<\/p>\n

And is one of Wall Street\u2019s oldest chestnuts of investment wisdom tragically wrong?<\/p>\n

This question too we will tackle.<\/p>\n

But first to that vicious den of sin and iniquity \u2014 the stock market.<\/p>\n

The Dow Jones roared 353 points today. The S&P rallied 28 points and the Nasdaq\u2026 109.<\/p>\n

For reasons we turn to the president\u2019s comments this morning:<\/p>\n

\n

Had a very good telephone conversation with President Xi of China. We will be having an extended meeting next week at the G-20 in Japan. Our respective teams will begin talks prior to our meeting.<\/em><\/p>\n<\/blockquote>\n

That G-20 meeting transpires June 28-29.<\/p>\n

We shall see.<\/p>\n

But how much value can you expect the stock market to shed in the next bear market?<\/p>\n

The United States economy has endured recession every five years since World War II \u2014 on average.<\/p>\n

Yet the present economic expansion runs to 10 years. It will be crowned history\u2019s longest next month.<\/p>\n

How much longer will the gods of chance be put off, cried down, ridiculed and shooed away?<\/p>\n

10-year Treasury yields have slipped beneath 3-month Treasury yields.<\/p>\n

This yield curve inversion has preceded each and every recession 50 years running.<\/p>\n

And last week the yield curve inverted to its steepest degree since April 2007.<\/p>\n

Meantime, Morgan Stanley\u2019s Business Conditions Index just endured its largest-ever monthly plummet.<\/p>\n

It presently languishes at its lowest level since December 2008 \u2014 the teeth of the financial crisis.<\/em><\/p>\n

In Morgan Stanley\u2019s telling, the American economy may already be sunk in recession.<\/p>\n

But today or 18 months from today… a bear market will likely come dragging in on recession\u2019s coattails.<\/p>\n

Thus we arrive at the inevitable question:<\/p>\n

How much value might the stock market lose in the next bear market?<\/p>\n

Financial journalist Mark Hulbert interrogated the history since 1900 (based on data from research firm Ned Davis).<\/p>\n

Investors have withstood 36 bear markets in these 119 years.<\/p>\n

Hulbert then zeroed in on stock market valuations.<\/p>\n

In particular, to the cyclically adjusted P\/E ratio (CAPE) hatched by Yale man (and Nobel winner) Robert Shiller.<\/p>\n

At 30.2, CAPE is mountain-high \u2014 that is, stocks are vastly expensive by history\u2019s standards.<\/p>\n

Today\u2019s valuations rise even above 1929\u2019s \u2014 and put 2008\u2019s in the shade.<\/p>\n

Only during the dot-com delirium were stocks dearer than today.<\/p>\n

\"Chart\"<\/p>\n

Hulbert\u2019s research reveals bear markets tend to greater severity when stock valuations are elevated.<\/p>\n

And so given today\u2019s wild valuations, how far might the Dow Jones drop next time?<\/p>\n

The answer, says Hulbert… is 35.3%:<\/p>\n

\n

A simple econometric model whose inputs are past bear markets and CAPE values predicts that, if a bear market were to begin from current levels, the Dow would tumble 35.3%. Though that\u2019s less severe than the 2007\u201309 bear market, it still would sink the Dow below 17,000.\u00a0<\/em><\/p>\n<\/blockquote>\n

In fairness…<\/p>\n

Hulbert concedes his findings do not rise to the 95% confidence level he seeks. But can you safely throw them aside?<\/p>\n

Assume the Dow Jones does go tumbling 35.3% \u2014 beneath 17,000.<\/p>\n

Worry not, says Wall Street.<\/p>\n

Hold on for the long pull. Buy and hold is the way.<\/p>\n

The stock market always comes back, the learned gentlemen assure us.<\/p>\n

The magic of annually compounding returns will ultimately leave you in easy waters.<\/p>\n

But have another guess, says analyst Lance Roberts of Real Investment Advice…<\/p>\n

Perhaps you seek 10% compounding annual returns for five years.<\/p>\n

Ten percent is handsome \u2014 but not extravagant.<\/p>\n

Assume 10% is precisely what you receive the first three years. But you lose 10% the fourth.<\/p>\n

What then happens to your gorgeous five-year 10% compounding?<\/p>\n

You would need to haul in a ludicrous 30% return the fifth year… to catch up.<\/p>\n

\"Chart\"<\/p>\n

Roberts:<\/p>\n

\n

The \u201cpower of compounding\u201d ONLY WORKS when you do not lose money. As shown, after three straight years of 10% returns, a drawdown of just 10% cuts the average annual compound growth rate by 50%. Furthermore, it then requires a 30% return to regain the average rate of return required.<\/em><\/p>\n<\/blockquote>\n

If you are approaching retirement \u2014 or already in retirement \u2014 can you afford to stagger 10%?<\/p>\n

Or 20%?<\/p>\n

You must further consider today\u2019s extreme valuations.<\/p>\n

The higher the valuation… the lower returns you can expect over the next several years.<\/p>\n

At today\u2019s valuation extremes…<\/p>\n

Would you be better off placing $3,000 into the stock market each year \u2014 or wedging it under your mattress?<\/p>\n

Roberts has given the numbers a good, hard soaking. At 20x valuations, he finds\u2026<\/p>\n

Your stock market money would finally exceed your snoozing cash\u2026 in twenty-two years.<\/p>\n

22 years!<\/em><\/p>\n

\u201cHistorically, it has taken roughly 22 years to resolve a period of overvaluation,\u201d affirms Roberts, adding:<\/p>\n

\n

Given the last major overvaluation period started in 1999, history suggests another major market downturn will mean revert valuations by 2021.<\/em><\/p>\n<\/blockquote>\n

And recall \u2014 today\u2019s CAPE is 30.2%. Perhaps stocks must wait even longer to break ahead.<\/p>\n

But can you afford to wait?<\/p>\n

Regards,<\/p>\n

Brian Maher
\nfor The Daily Reckoning<\/em><\/p>\n

The post REVEALED: How Far Stocks Will Fall<\/a> appeared first on Daily Reckoning<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

This post REVEALED: How Far Stocks Will Fall<\/a> appeared first on Daily Reckoning<\/a>.<\/p>\n

The economy is long overdue for recession… How far you can expect the Dow to fall during the next bear market… <\/p>\n

The post REVEALED: How Far Stocks Will Fall<\/a> appeared first on Daily Reckoning<\/a>.<\/p>\n","protected":false},"author":16,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"footnotes":""},"categories":[484,366,2904,719,2905,463],"tags":[],"_links":{"self":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/1122219"}],"collection":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/users\/16"}],"replies":[{"embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1122219"}],"version-history":[{"count":1,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/1122219\/revisions"}],"predecessor-version":[{"id":1122220,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/1122219\/revisions\/1122220"}],"wp:attachment":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1122219"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1122219"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1122219"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}