by GMM
Summary
- The stock market has completed the first phase of a bear market with a rapid and sharp Q1 sell-off caused by massive deleveraging
- Stocks still need to deal with its valuation problem as well as discounting the long-term financial and economic impact of the Coronavirus shock
- Even with the 25 percent sell-off since the February 19th high, stock market capitalization-to-GDP remains extremely elevated, still higher than its pre-GFC high and at the 85th valuation percentile
- Our analysis illustrates that stocks still have 40-56 percent of downside to reach the valuation levels where the past two major bear market’s bottomed
- Time, rather than price, could bring valuations back into line with historical valuation levels as stocks settle in for a protracted bear market
- A loss of confidence in the dollar as the world’s reserve currency could spark inflation and boost stocks as an inflation hedge