Predictions for the Coronavirus Stock Market

Consider the cyclically adjusted price-to-earnings (C.A.P.E.) ratio (real stock price divided by a 10-year average of real earnings, sometimes called the Shiller P/E) that I have been advocating for decades. It was 31 in January 2020. That was high, surpassed only in two previous periods: the 1929 peak just before the crash, when it was 33, and in 2000, just before the 50 percent stock market drop, when it was 44.

Now, the C.A.P.E. is 23, compared with the historical average since 1881 of 17. From this perspective, the market looks on the expensive side, but not inordinately so.

When the C.A.P.E. has been at such a level, it has tended to show moderate positive, not disastrous, returns over the next 10 years.

If we stopped here, we could be sanguine about the market’s prospects for the next decade. After all, epidemiologists conservatively forecast that the present pandemic will be over in a couple of years, at the most, though there may later be resurgences. We may well have a vaccine and effective treatments for the disease by then.

Unfortunately, though, we can’t stop there.

I worry that the present anxious situation may stay in the collective memory for decades, much as the stock market crash of 1929 did. That could make people more risk-averse, possibly portending lower valuations on the stock market.

Consider that the 1929 crash and the Great Depression have remained vivid in the collective memory for over 90 years.

The stock market record from that period is sobering. I’ve calculated the real total return (including dividends and inflation) of the S&P Composite Stock Price Index. Using that metric, after the 1929 market peak, stock prices lost three-quarters of their value by 1932. They didn’t rise above their 1929 peak until November 1936, seven years later.

Source Article