A Rough Estimate for Market Bottom: 39% Below

Executive Summary:

-         The 2020 market rout is already among the most severe. History over the past century shows more pricey markets tend to experience worse drawdowns.

-         A simple regression study yields a rough estimate for the market bottom: S&P 500 index at 1567, which is 39% below Mar 31 2020 level.

-         Rather than a precise estimate, this educated guesstimate brings to the front the bubbly market backdrop against which the twin shocks of coronavirus and oil are hitting hard. It may help investors better assess the worst case scenario and act accordingly.

2020 selloff is among the most severe in history

History shows that the bigger the bubble the bigger the burst

Using the above market routs as sample, we can see a connection: the pricier the market, as measured by the Shiller Cyclically adjusted price-to-earnings ratio (CAPE) at the market peak, the worse the subsequent maximum drawdown.

A rough estimate: extra 39% downside from 2020-03-31