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Three Factors

John P. Hussman, Ph.D.

From the standpoint of downside risk over the completion of the current cycle, merely touching historically run-of-the-mill valuations in the next few years would presently require a decline in the S&P 500 on the order of 57-62%. Even coming within 25% of historical norms (which no market cycle in history has failed to revisit, even since 2000) would require a market decline on the order of 47-53%. 

Suffice it to say that a 50-60% loss in the S&P 500 over the completion of the current market cycle would not be a “worst case” scenario, but instead a run-of-the-mill outcome. 

I’ve been asked what I would consider a “worst case” scenario from a valuation standpoint. You may not want to know, but the chart at the top of this comment offers some perspective as a matter of historical record. On the most reliable measures, 

the current level of valuations stands at about 2.5 times historical norms (i.e. an average of 150% above those norms), and the lowest point for valuations reaches about 0.45 of historical norms at the 1982 secular low (i.e. -55% below those norms). 

The journey from one to the other would involve a market loss of -82%. 

That outcome strikes me as extraordinarily unlikely in the foreseeable future.

 DYI:  From absolute peak to trough to complete a total mean inversion will take multiple booms and busts.  At the secular bottom PE¹⁰ will be under 10 and the S&P 500 dividend yield north of 5%.  An eighty two percent decline is a very real possibility just not within this upcoming decline.

DYI