A Stock Market Bottom Scenario

We spend many hours each week reviewing a variety of the very best sources for new insights.  Given how uncertain things are right now, I thought I’d post a few more articles than usual that we’ve found especially useful during these difficult times. Here’s one of those below:

It is hard to predict what will bring a market out of a correction – no one has a crystal ball. Will it be figuring out the US Debt, the European Debt, or maybe some new Technology…who knows.

One thing we can do is make an educated guess – the “probability” of possible outcomes; then come up with “likely” scenarios for the market, based on past experience.

Here is a great article that does just that (click HERE).  It’s written by a portfolio manager of a mutual fund (Keith Goddard, Capital Advisors Growth Fund (CIAOX). It’s very detailed, and I encourage you to read it if you’re having trouble sleeping at night

For those that prefer the “cliff note” version, I’ll summarize the results below. He examines a Matrix of Possible Outcomes:

• Three Economic Scenarios: No Recession, Mild Recession, Severe Recession
• Four Valuation Possibilities:  Low Historical P/E, 2^nd Quartile P/E, 3rdQuartile P/E, Highest End of P/E range

So, Goddard runs a Matrix of outcomes:

• Severe Recession & Low Valuation,
• Mild Recession / Middle Range of P/E;
• No Recession / High P/Es.

You get the idea => 12 possible outcomes. (wow, stay with me now, almost there…)

You can assign your own probabilities to each of the 12 outcomes, but my bet, and Goddard, is somewhere in the mild – no recession scenarios. Why – because we have low / stable inflation, a Fed committed to low interest rates, corporations have more cash on the balance sheet than any time in the past.

I also doubt the upper-upper end scenario – usually coincide w steady above average economy growth (greater than 4% GDP), which doesn’t sound like the “muddle through” economy most are expecting.

Results of his analysis:  If the economy can avoid a recession altogether over the next two years, which Goddard thinks this is the likeliest scenario; stocks could provide a cumulative return between +15% and +45% over the next two years, depending on the outlook for the normalized P/E ratio going forward.

I know it doesn’t answer “what” causes the turnaround, but it does answer the “where can the market go from here?” question. Remember, you can’t predict, but you can Plan for the Future. Find out now if you’re On Track (HERE).