Stocks officially have entered a bear market, with the S&P 500 index recently at 3,793, down 21% from its Jan. 3 record closing high of 4,797.
Some experts think the market has further to fall, as inflation roars and the Federal Reserve readies further interest-rate hikes to quell those price increases.
The Fed tightening risks causing a recession.
But renowned Wharton finance professor Jeremy Siegel, who is generally bullish on stocks, isn’t giving up hope now.
“Hold in there,” he told CNBC. “If you got cash, begin to employ it. You won’t be sorry a year from now.”
The market has recovered from bigger drops than what we’re experiencing now, Siegel noted
“We’ve had bigger shocks in the past,” he said.
“There may be another 5%, who knows, there may be another 10%, but that … just raises the return on the market looking forward.”
The 8.6% inflation rate registered for the 12 months through May, a 40-year high, has sent shudders through the market.
But Siegel is undaunted, looking for stock returns to ultimately exceed inflation.
“Through history, the S&P 500 has beaten the CPI [consumer price index] by 4% to 5% a year,” Siegel said. “So it is way below its lag. In the long run, the evidence is we’re going to overcome that inflation with this stock index.”
But some bears think the stock market’s slump could last for quite some time.
They note that while valuations have come down during the market’s decline, they’re still elevated historically.
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The forward 12-month price-earnings ratio for the S&P 500 stood at 16.8 as of June 10, according to FactSet.
While that’s down from the five-year average of 18.6, it’s barely changed from the 10-year average of 16.9.
And the past five years and 10 years have been very strong periods for stocks, which generally means higher valuations.
The S&P 500 has returned an annualized 11.9% for the five years through June 10 and 13.61% for the 10 years through that date, according to Morningstar.
Those are outsized performances, compared to the 10.7% annualized return from 1957 through 2021, according to Moneychimp.
Bottom line, bears say: stocks are overvalued.
They also see earnings as a weak spot. With almost all S&P 500 companies having reported first-quarter numbers, analysts see profit growth for the quarter totaling 9.2%, according to FactSet.
But they expect that growth rate to slide to 4% in the second quarter. That would be another negative factor for stocks.
However, bulls like Siegel point out that stocks ultimately have overcome drops throughout their history.
Perhaps the real question is how long the decline will last. Siegel obviously thinks it will be less than a year.
In the last 19 bear markets, the average drop totaled 37% peak to trough, with an average duration of 289 days, or about 9.6 months, according to Bank of America.
So perhaps Siegel is right.
But then again, from 2000 to 2009, stocks returned about zero. So anything is possible.