Eight Metrics Suggest the S&P 500's Long-Term Fair Value is 2,479
That's at least up from 2,412 at the beginning of February though!
My headline today might be somewhat controversial as it suggests a very low fair value for the S&P 500. That fair value is really just the result of a simple methodology. Is it the real fair value? Heck if I know! I’m just reporting the results of some relative valuation metrics. As always, take things with a grain of salt - especially anything you read on the internet.
If you are curious about how that number was derived, check out the following table:
In this table there are eight different relative valuation metrics. If you average all of those results you get a value of 2,479. Each of those metrics has its own interpretation of how far the market should fall to be in line with a long-term average for that ratio. When we did that same analysis three months ago, the market was a lot more stretched for those eight metrics:
Now, what exactly would it mean if the market really did go back to about 2,500? I guess it would be in line with long-term averages for each of those metrics but how would it compare contextually to past downturns?
Here we see that a drop to the 2,500 level for the S&P 500 would put it in the top five market downturns since the Great Depression. The two downturns it would be most similar to are the dot-com bubble and the golden bear market.
Sometimes the current market condition is compared to the dot-com bubble. So, maybe the market falling that low isn’t quite so unthinkable.
On the other hand, less people are familiar with the golden bear downturn. That occurred when we went off the gold standard and there was a massive oil shock. Hmm…well, an oil shock sounds familiar that’s for sure.
It’s unclear how far the market will fall. Just three months ago a drop to 2,500 would’ve been unbelievable, even if metrics suggested that was a fair value. Now that things have dropped this far and pessimism is rampant, it doesn’t seem as impossible to at least consider.