With equities down about 19% from its February peak as of March 9, economists at Vanguard believe the correction has pushed stocks well into “the range of fair value.” That doesn’t mean they couldn’t keep falling further, according to senior economist Andrew Patterson.
The giant mutual fund and ETF complex says that, at present, fair value on the S&P 500 lies somewhere between 2,600 and 3,300. It closed Monday at 2,746, well below the 2,950 mid-point of its range.
Of course, equity prices could fall below the bottom end of its fair value range, especially if the news gets a lot worse. A Vanguard official adds that its measure of fair value can change as yields, inflation and inflation expectations change. For all of 2020, the S&P 500 is down about 15%.
Much of what happens next revolves around the timeframe and duration required to contain the coronavirus. In the short term, the news cycle is likely to get worse.
But using China’s experience with the disease as a predictive yardstick, Patterson thinks that the virus could start heading into the rearview mirror in April, probably late in the month. If that happens, it’s likely the U.S. and most of the rest of the world can avert a global recession.
“If it doesn’t happen until late May or June,” Patterson said, the odds of a global recession will become more elevated. The IMF defines a global recession as global GDP growth of 2.5% or less.
If virus outbreaks continue into May or June, there could be a mild global recession along the lines of 2001, Patterson continued. Over the next two months, the response of policymakers will be critical for markets.
“We’re not here to dictate policy,” he added. However, if markets perceive an ineffectual approach from Washington, D.C., and other governments around the world, the crisis in confidence could get significantly worse.