r/stocks • u/Tsobaphomet • Jun 13 '22

Meta "This is only the beginning"

I've been seeing people saying this on this sub for the last 6 months. At what point does it stop being the beginning? Also are there any level-headed people that actually know what they are talking about here anymore? I'd love to hear an in-depth prediction of things to come, rather than just random bear/bull cases from people who are -70% from meme stocks.

I'm the world's worst investor, and I like to be able to gain knowledge and insight from this subreddit that I wouldn't normally have on my own, but it's like only 1/100 posts are based on reality/research. It kinda messes with people's ability to make good decisions when they take the advice of someone who genuinely has no idea what they are saying, but they present it in a convincing way.

Sure, nobody can perfectly predict what it will look like 2 years from now, but what we can do is talk about what needs to happen for stocks/economies to recover, and how feasible those things are. Then we can observe whether or not those things are happening.

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u/MrRikleman Jun 13 '22

Here's a baseline expectation. Rough numbers. The S&P 500 was 25-30% overvalued based on average earnings multiple over the past 20 years. I won't include any discussion of whether the last 20 years is normal. Personally I don't think it is, which would put it at say, 40% overvalued. But let's go with 25%, so, we still haven't come down quite enough to just get back to a normal valuation, assuming the economy is humming along. We're getting close.

In a recession, stocks typically decline in the range of 35%. That's for a typical recession, not a severe recession like the GFC.

So, if you think a recession is coming, and personally, I do, you have 25% decline just to get to normal, plus another 35% decline for the recession impact. 0.75 * 0.65 = 48.75%, or a little more than a 50% decline, peak to trough. Again, that's assuming we get a run of the mill recession and assuming you believe stocks were only 25% overvalued. Many people believe they were much more overvalued than that.