The bearish theses I have had for the past few weeks have been coming to fruition in the past few days. The reward for being correct has thus far been less than a 2% correction in the S&P 500. The tilt is clearly positive. Being precisely correct on two negative catalysts still hasn’t brought a 5% correction which hasn’t happened in many months. The two negative catalysts are a crash in oil prices and a delay in the passing of the GOP’s pro-growth legislation. On Thursday, the price of WTI oil was down about 2% to $49.28 as it exits the range of the low $50s which it has been in all year. The GOP’s proposals aren’t going to be passed as quickly as previously expected. The market must’ve forgotten that politicians don’t get things done quickly. There are some quirky Congressional restrictions which are preventing quick passage, but the main reason the passing of healthcare reform won’t go quickly is because there is a big ideological difference between the moderates and the conservatives in the GOP.

Before I review the two latest bearish catalysts, let’s review how expensive stocks are. The chart below shows the S&P 500’s forward PE. It shows where the stock market would go if the forward PE fell to various levels. The 10-year average forward PE is 14.4. If it fell to that multiple, the S&P 500 would fall to about 1,900 which would be over a 400-point decline. Forward earnings estimates won’t have to fall as much as in 2008 to have a similar sized decline as the market was trading at about a 15 forward PE before the crash.

The second chart I have below uses the market cap of non-financial companies divided by the gross value added including foreign revenues to determine future 12-year annualized returns. Because the market is so expensive, the 12-year expected annualized return is slightly above 0%. As you can see, this future return estimate has been quite accurate in the past 50 years of data. This is a long-term forecast which allows investors to contextualize short-term movements in stock prices.