No one expected this crash.
But we were long overdue. We were stretched fundamentally and technically, with the coronavirus the straw that broke the camel’s back.
“Historically our stock market is fundamentally connected to corporate earnings and the overall GDP, with typical stock price ratios of 15 times earnings and an overall market capitalization of about 0.9 times GDP. Lately, we have been running at 22+ PE ratios and two times the GDP,” said Norm Miller, University of San Diego, as quoted by The San Diego Union Tribune.
“Low interest rates explain part of the higher ratios, but we were due for a correction and the coronavirus provided the trigger,” he added.
Kelly Cunningham, San Diego Institute for Economic Research, added, “Simply comparing the stock market to size of the economy or U.S. equity market cap-to-GDP ratio was at an all-time high. Average price-to-earnings ratio of 18.4 times had also not occurred since the “dot-com” bubble of 2000. This indicated the bulk of increase in stock valuation came not from earnings growth but investors unrealistically valuing or speculating on future growth. If the stock market was not overvalued, the coronavirus would not have as much effect.”
Now, even Goldman Sachs says we have further to fall.
David Kostin, chief U.S. equity strategist, wrote that, “After 11 years, 13% annualized earnings growth and 16% annualized trough-to-peak appreciation, we believe the S&P 500 bull market will soon end,” as quoted by CNBC. “Investors have cut their equity positions in recent weeks, but not to levels reached at the trough of other major corrections this cycle.”
He also believes the market could fall another 15% from current levels. “Both the real economy and the financial economy are exhibiting acute signs of stress. Supply chains have been disrupted and final demand has declined for many industries. Travel is contracting sharply as both individuals and businesses restrict movement.”
“Airlines, hotels, cruises, and casinos report plunging demand, lower occupancy, and cancellations. Employees are being furloughed.”
However, he does believe we’ll see a rebound in the second half of the year, which could boost the S&P 500 to 3,200. Let’s hope he’s right on the rebound.
How Investors are Still Preparing for Volatility
As we’ve noted, three of the best ways to prep for volatility include:
ProShares Ultra VIX Short-Term Futures ETF (UVXY)
The ETF was designed to match two times (2x) the daily performance of the S&P 500 VIX Short-Term Futures Index.
VelocityShares Daily 2x VIX Short-Term ETN (TVIX)
The TVIX is another great way to trade elevated volatility. This ETF tracks an index of futures contracts on the S&P 500VIX Short-Term Futures Index.
iPath S&P 500 VIX Short-Term Futures (VXX)
The VXX ETN provides exposure to the S&P 500 VIX Short-Term Futures Index Total Return. As volatility shoots higher, so does the VXX.