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…Things are going to get worse before they get better but I expect this bear market to end at some point this summer and, in the meantime, if there is a bear-market rally of 10%, I plan to cull my stock portfolio of positions that are lower quality and upgrade my holdings overall to slowly position for the next bull market run.
An unprecedented contraction in economic activity is underway, and it will result in:
- a recession over at least the next six months
- corporate earnings will plunge
- companies will go bankrupt
- people will lose their jobs.
...I believe that a realistic downside target for the S&P 500 is 2000, which is also the 50% Fibonacci retracement level…I arrived at 2000 because it is that average of the trough multiples we saw on trailing peak earnings during the last two recessions. That multiple is 12.9 times my estimate of $155 in earnings for 2020. If I dropped my earning estimate to $125, I would arrive at 1612. If your earnings estimate is lower, then it makes sense to lower your target for the bottom of this bear market.
An investors’ downside target should dictate the rate at which they deploy capital. My target is 2000 but I will still be prepared for lower levels by maintaining some cash. I’ve also taken steps to profit from a bear-market rally…[with] the passage of the stimulus bill…There’s a powder keg of monetary stimulus already in the financial system…[and the new] fiscal stimulus package may be what ignites it…
I…[don’t intend to] sit here and wait for the S&P 500 to decline to [my projected] 2000, then pull a trigger and move back to a fully invested position. [Instead,]
- I am adding risk gradually as markets fall at a rate that will still give me dry powder at my target of 2000.
- That said, if…[there is] a bear-market rally of 10%, I will cull my stock portfolio of positions that are lower quality and upgrade my holdings overall, thereby reducing exposure to risk again.
- This back and forth process…[will] be done repeatedly in preparation for when the next bull market begins...
Now that fear is reaching extremes, opportunities abound. Join us as we look to slowly position for the next bull market run.