After 15 years of being overvalued, stocks have finally fallen modestly below fair value, which we put at about 950 on the S&P 500 (versus today’s 880). As we’ve noted frequently in the past few months, the three huge bubbles of the past century have been followed by stocks bottoming at about 50% below fair value. This would be about 500 on the S&P 500 and 5,000 on the Dow.
Three prior events do NOT form a conclusive sample size, and stocks may well have already hit bottom. We doubt this and find the “S&P 600” story persuasive, but given the market’s current valuation, we’re also comfortable adding new long-term money at this level.
Here’s an interview we did on TechTicker yesterday with economist Gary Shilling, who has been more right in recent years than just about anyone else.
Aaron Task: The S&P 500 could fall to as low as 600 in 2009 and “alternative assets” like commodities and currencies will provide no shelter for investors, says Gary Shilling, president of A. Gary Shilling & Co.
Having been appropriately bearish heading into this year, Shilling sees “few good places to hide” in 2009. Currently, Shilling is long Treasuries and the dollar, but notes the bond market’s rally is getting long in the tooth.
Other than defensive plays like utilities and consumer staples, Shilling is short stocks. His “S&P 600” prediction, a 33% drop from current levels, is based on a view that S&P earnings will be $40 per share next year (vs. the consensus of $83) and the index will trade with a P/E multiple of 15. (Here’s the maths: $40 EPS x 15 P/E = 600.)
Shilling is also commodities and remains bearish on emerging markets, most notably China. The theory China, most notably, could “decouple” from the U.S. doesn’t hold up to scrutiny, Shilling says, as evinced by the slowdown of China’s economy and the fact their middle class isn’t large enough to sustain growth internally.
Against that backdrop, Shilling isn’t only bearish on China as an investment, he sees the potential for major social upheaval in the world’s most populous nation.