Tags: Nyaradi | S&P 500 | 50% | PE

John Nyaradi: Stocks May Drop Almost 50 Percent

By Dan Weil   |   Monday, 27 Jan 2014 09:34 AM

The stock market is poised for a hefty fall, based on price-earnings (P/E) valuations, says John Nyaradi, publisher of Wall Street Sector Selector.

For example, Robert Shiller's cyclically adjusted P/E (CAPE) ratio, which utilizes 10 years of earnings, stands at 25.4. A correction back to the 12.5 level of the late 1980s would put the Standard & Poor's 500 Index at 919, Nyaradi writes in an article for MarketWatch.

That represents a 49 percent plunge from Friday's closing price of 1,790.

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

Alternatively, if the P/E ratio using trailing 12 months' earnings slid from its current level of 17.3 to the 12.8 level prevailing in January 2012, the S&P 500 would decrease 33 percent to 1,195, Nyaradi says.

The Federal Reserve's massive easing program has played a key role in boosting stocks during the past five years, and it would be the Fed that would likely cause a major correction, he says.

"Inability to control interest rates or a misstep in the taper could trigger extreme volatility," Nyaradi writes. "Just a simple loss of confidence in the Fed and/or its new chair could be a catalyst for the first significant decline in years."

The stock market's plummet Thursday and Friday may have some investors wondering whether a substantial correction already has begun. Weakness in emerging markets has spilled over into U.S. stocks.

"The volatility of the emerging markets and the currency impacts are affecting U.S. markets," Eric Teal, chief investment officer at First Citizens BancShares, tells Bloomberg.

"Following the strong gains of last year, I think it’s to be expected that you might have an overreaction here of selling."

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

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