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"The pain from which we were spared did not go away; it was being bottled up in the pain jar."
Vitaliy Katsenelson, author of Contrarian Edge
“Buy the dip” and “Stay the course” presume the worst is almost over. But two different forecasting methods predict a 54% stock market loss in 2022. Someday the stock market bubble will burst. But the data says we have not seen the worst of equity market declines.
Here are a couple quick estimates of how much more the stock market could lose. One method uses a tautology in forecasting that relies mostly on changes in the price/earnings ratio, namely a contraction to normal levels. Another method uses regression to the mean
Using a return-forecasting formula
As shown in green in the following table, the stock market will return 8% if P/E ratios stay at 35 and earnings grow at 6%. But as shown in the yellow, stocks will lose 53% if P/Es revert to their historic level of 15. That’s if the P/E returns to 15 in 2022. If the move to 15 occurs gradually over the next decade, stocks will lose 1% per year.
