August 26, 2015

Fair market valuation and scenarios for markets in 2015

My "Fair Market Valuation" for the S&P index is at around 1990, and I expect it to be breached in the fullness of time as markets move quite often to extremes and overshoot equilibrium levels. More importantly, there are more dire economic scenarios that could signal much lower market price targets.

Below is a summation of the criteria and methodology I use to evaluate the "fair market value" or equilibrium level of the S&P index:

Scenario #1: Economic Acceleration Above Consensus (Probability: +10%) -- +3% Real U.S. GDP growth, +2.0% to +3.0% inflation and +8% to +12% profit growth. Stocks climb by 7.5% over the next 12 to 18 months. 
S&P target is 2245

Scenario #2: Status Quo (Probability: 25%) -- +2% to +3% Real U.S. GDP growth, +1.5% to +2.0% inflation and +5% to +9% profit growth. Stocks climb by 5% over the next 12 to 18 months. 
S&P target is 2195

Scenario #3: Muddle Along (Probability: 25%) -- +2% Real U.S. GDP growth, +1.5% inflation and +3% to +5% profit growth. Stocks climb by 0% to 5% over the next 12 to 18 months. 
S&P target is 2140

Scenario #4: A Garden Variety Recession (Probability: 25%) -- Negative Real U.S. GDP growth, less than +0.5% inflation and a decline in profits: Stocks drop by 13% to 17% over the next 12 to 18 months. 
S&P target is 1775

Scenario #5: A Deep Recession (Probability: 15%) -- Negative Real US GDP growth, deflation and a large drop in profits: Stocks drop by more than 20% over the next 12 to 18 months. 
S&P target is 1625

The buy-the-dip mentality has been ingrained -- we see it 24/7 from talking heads paraded on the business media -- so the Bull Market will likely end not with a bang but with a saw-tooth move lower.

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