On the heels of a record-fast 30% selloff in the stock market, every investor across the globe is asking the same question: When will this terrifying crash in stocks end?
The reality is no one knows. The coronavirus from China is a tricky and unprecedented situation that will produce tricky and unprecedented outcomes, the sum of which are nearly impossible to predict with any significant certainty.
But, as analysts and investors, it’s our job to do the very best we can to understand when this selloff might end, so that we can adjust our portfolios accordingly to minimize near-term risk and maximize long-term reward.
With that in my mind, here’s my two cents on when this terrifying selloff might end.
It will likely end sometime in the middle of the second quarter. Probably around May. And it will likely end at prices not much lower than we are seeing today.
Pay Attention to Two Factors
When it comes to stocks, I’ve always said that there are two important factors that influence stock prices. Those two factors are:
- Fundamentals. In the big picture, stock prices move alongside earnings. When earnings go up, stocks go up. When earnings go down, stocks go down. In order for stocks to rebound, then, earnings — which are projected to drop in Q2 — need to bottom out and rebound.
- Optics. Regardless of the fundamentals, if investors aren’t buying stocks because things look bad, then the stock market won’t go higher. Thus, in order for this selloff to end, the optics surrounding the U.S. economy and the coronavirus pandemic need to materially improve.
Fortunately for investors, it appears that the fundamentals point to an earnings bottom sometime in the third or fourth quarters of 2020, and significant potential upside from here into the end of the year.
At the same time, the optics should start to improve by late April, paving the path for more buyers to enter the market.
The Fundamentals Imply Limited Further Downside
When it comes to the fundamental picture behind the stock market, it’s not great today.
Corporate profits will tumble in the second quarter of 2020. Assuming the worst of the coronavirus pandemic is gone by July — thanks to social distancing measures taken today and warmer weather — profit growth trends should improve in the third quarter. But, lingering memories will keep corporate profit growth slightly negative.
By the fourth quarter, however, those memories will largely fade. Enormous fiscal and monetary stimulus will power a corporate profit rebound. That rebound will translate into even bigger growth in 2021.
Big picture — corporate earnings are set to plummet in Q2, bottom in Q3 and rebound in Q4 and 2021.
Back in 2009, the stock market bottomed in the first quarter of 2009. Profits bottomed in the second quarter. Assuming a similar dynamic, this stock market crash will likely find a bottom in the second quarter of 2020. That bottom should be at levels close to where the index trades today (my realistic worst-case scenario for earnings is $150 per share in 2020, and a historically normal 15-times multiple on that implies a “bottoming” price of $2,250 for the S&P 500).
When it does find a bottom, the ensuing upside rally could be huge. My modeling suggests that fiscal 2021 corporate earnings per share could come in around $170. Based on an 18-times forward earnings multiple — which is an appropriate multiple for a growing market with a 10-Year yield down near 1% — that implies a 2020 end price target of over 3,000.
The Optics Should Improve
Much like the fundamentals, the optics surrounding the stock market today aren’t great.
The U.S. government has yet to show a unified front against the coronavirus pandemic, which is rapidly spreading throughout the U.S. and Europe with increasing momentum. Until government support actually arrives and/or until the virus stops spreading at an exponential rate, stocks won’t stage a sustainable rebound.
Fortunately, it looks like those two things may happen by late April.
The U.S. government is close to pushing out a stimulus package that would put checks in the hands of every American, and provide business loss insurance. That stimulus package could roll out sometime in early-to-mid April. The physical rolling out of that package will provide a boost to investor sentiment.
Concurrently, my modeling suggests that Europe will start to see a slowdown in new reported cases by mid-to-late April. Because the U.S. has followed a Europe-like trajectory on the coronavirus front, plateauing cases in Europe will provide insight as to when the virus might peak in the U.S. That insight should similarly boost U.S. investor sentiment.
What to Expect From the Stock Market
The stock market is in panic mode right now. But history tells us that such panics don’t last forever. They always end, and when they do, they start a new bull market.
Timing this particular bear market is tough to do. The coronavirus presents unprecedented financial risks that are difficult to model. But, at the present moment, it looks like the fundamentals and optics surrounding the market will start to improve by late April or early May, as we start to see the benefits of social distancing in fighting the virus and that stimulus packages start to provide tangible relief to American workers and industries.
When those things happen, the bear market will end, and a new bull market will begin.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.
