How Low Can Stocks Go?

Every time stocks fall a little, investors fear they will fall a lot. And every time they fall a lot, people think they’re going to sink even lower.

Before we talk about how much lower stocks can fall, let’s take a look at the current decline. The people’s index, the Dow, is down just 14% from its peak. The S&P is down 18%. The Nasdaq lost 28%, and the Russell 2k fell 30%.

Nobody knows where this ends, but I think a first logical step would be at the pre-pandemic highs. Just wipe out all the gains that came from a combination of stimulus, ZIRP, and everybody getting rich without any effort.

This chart shows how far these indexes have come from their pre-pandemic highs, and how far they would need to fall to get back there.

Turning the chart into numbers, we can see that the Russell 2000 basically gave back all of the gains. Up 44%, down 30%, and you’re back to where you started.

The Nasdaq 100 gained the most, and so would have to lose the most to give it all up. It’s already down 28%, but would need to fall another 19% to get back to where it was in January 2020.

I’m always of the opinion that even if you know what’s going to happen in the future with the economy, you can never know how the market will react to it. The pandemic being the perfect example of that dynamic. But now, I actually think it’s pretty simple.

Here’s the data I would want six months from now to answer where the market will be; What’s inflation, and where’s unemployment? If the fed can cool inflation without sending the economy into a deep recession, then I think stocks are a screaming buy here*. If inflation is still 8% in the fall and layoffs pick up, then we’re giving it all back, and possibly more.

Josh and I covered this and much more on this week’s TCAF with Jan Van Eck. Hope everybody has a nice weekend away from the screens.

*Full disclosure. At 37 years old, with a multi-decade horizon, I always think stocks are a screaming buy.