Baron Rothschild, the 18th-century British banker advised that "The time to buy is when there's blood in the streets, even if it is your own." He made a fortune buying government bonds in the panic that followed the Battle of Waterloo against Napoleon. But it's not sovereign debt of the world's superpowers that is on sale today; it's not the S&P 500 or Dow either.
US government bonds already had their biggest year-over-year rally ever, and at record low yields, they are no bargain. As for US stocks, it's only the first month after what we believe was a historic market top. The problem is that the pandemic just so happened to strike at the time of the most over-valued US stock market ever based on a composite of eight valuation indicators tracked by Crescat, even higher than 1929 and 2000. It also hit after a record long bull market and economic expansion. The stock market was already ripe for a major downturn based on an onslaught of deteriorating macro and fundamental data even before the global health emergency.
As we show in the chart above, we believe there is much more downside still ahead for US stocks as a major global recession from nosebleed debt-to-GDP levels has only just begun. Corporate earnings are now poised to plunge and unemployment to surge. These things are perfectly normal. There is a business cycle after all. It must play out as always to purge the economy and markets of their sins and prepare the way for the next growth phase. From the February top for large cap stocks, it would take a 56% selloff just to get to long term mean valuations, a 74% decline to get to one standard deviation below that. In the worst bear markets, valuations get to two standard deviations below the mean. Such realities happened at the depth of the Great Depression, the 1973-4 bear market, and the 1982 double-dip recession. 1932 was an 89% drop from the peak. The initial decline in this market so far is comparable to 1929 in speed and magnitude. There will certainly be bounces, but even after an almost 30% fall in the S&P 500 through yesterday's close, we are not even close to the "blood in the street" valuations that should mark the bottom for stocks in the current global recession that has only just begun to unfold.