Don’t be surprised if the S&P 500 loses another fifth of its value, says Jamie Dimon. While such a plunge would rattle the nerves of traders and frayed retirement accounts, history shows that it would require no major departure from past precedent.
Judging by the valuation and its impact on long-term returns, a chief executive officer of JPMorgan Chase’s “20 percent” stumble that would trigger a bear market is normal in many respects. A drop to nearly 2,900 in the S&P 500 would leave the metric 39 percent below its January high, a notable crash but dwarfed by both the internet crash and the global financial crisis.
JPMorgan’s president, Jimmy Dimon, had some sobering words for investors.attributed to him:Bloomberg
The price implied in Dimon’s scenario is roughly the index’s peak since 2018, the year President Donald Trump’s tax cuts took effect and the stock sale forced the Federal Reserve to end its rate hike. Rolling back the gains since then will leave investors with nothing over the course of four years, a relatively long respite. But, given the strength of the bull market that raged before, it would only cut annual gains over the past decade to about 7 percent, in line with the long-term average.
Nobody knows where the market is headed, Dimon included, and much will depend on the evolution of Fed policy and whether earnings will hold up to anti-inflation measures. But as an exercise, it’s worth noting that the scale-pull he described is unheard of, and will afflict many Wall Street veterans as a justifiable expense in a market where the Fed’s generosity has excelled.
Michael Kelly, global head of multiple assets at Pinebridge Investments LLC, said on Bloomberg TV that the lower interest rates were “great for valuation multiples and we’re in the process of eliminating all of that”. “We’ve had easy money for a long time and we can’t fix it all too quickly.”
At 34 percent, the average bear market since World War II has been a bit shallower, but declines are varied enough that a 40 percent drop fits within the bounds of plausibility. One of the reasons for the current decline is evaluation. In short, even after losing $15 trillion ($23.9 trillion) in value, stocks are far from obvious deals.
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At its lowest level last month, the S&P 500 index traded with a gain of 18 times, a multiple of the lower valuations seen in all 11 previous bear cycles, according to data compiled by Bloomberg. In other words, should stocks recover from here, this bear market bottom would be the most expensive since the 1950s. On the other hand, matching this average would require another 25 percent drop in the index.
“It’s different now,” said Willie Delwich, investment analyst at All Star Charts. “Given what bond yields are doing, I don’t think you would say a 40 percent drop from peak to bottom is out of the question. “.
Originally published at Melbourne News Vine
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