There aren’t a lot of investors who can say they warned clients about the coronavirus crisis and eventual 30% stock market collapse, but hedge fund founder Dan Niles is certainly one of them.

In a February letter obtained by Yahoo Finance sent to clients of his long-short Satori Fund, Niles warned he was becoming “increasingly worried” that central bank accommodativeness was overshadowing the impact that COVID-19 would have on the global economy.

After adjusting his position before the S&P 500 fell by more than 30%, his Satori Fund finished the first quarter in the green. But speaking to Yahoo Finance Wednesday, Niles warned that the brief respite from selling to end March was more likely due to pension fund rebalancing than it was due to a true, bonafide bottom and he projected up to another potential 30% drop from March’s end point.

“If you go back and look at history, there are nine times that the market has sold off about 30% or so since the 1920s, so it’s pretty normal,” he said. “You get one of these every 10 years or so and if you look at every one of them, you always get these bear market rallies.”

Pointing to the most salient example in the Great Depression, Niles highlights the average gain over those so-called bear market rallies totaled 24%, compared to the drops that averaged 33% on what ended up being an eventual 86% top-to-bottom collapse.

“So these rallies kept sucking investors back in, you know, in the sense that you thought it was over and then you got worked over,” he said.

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In his view, that’s what is shaping up to happen to investors who bought during the last week of March as the $2 trillion stimulus bill and Fed actions propelled the S&P 500 to bounce 18% off its low. On top of that, Niles points out that the historical rebalancing for pension funds that takes place at the end of a quarter may have also attributed to a false rally.

Looking at the nine times in the past 30 years when the S&P 500 has diverged from bond market performance by more than 10%, in the final five trading days of the quarter the S&P 500 has historically rallied to return 6.8%, Niles says. That aligns nearly perfectly with the S&P 500’s 7.3% rally through Wednesday’s open. However, once that rebalancing takes place, history shows in the ensuing five trading days of the following quarter, stocks historically have retreated by an average of 1.1%, advancing less than 25% of the time. By falling nearly 4.5% in its first day of second-quarter trading Wednesday, the S&P 500 is pacing to repeat that history as well.

Nowhere near the bottom

But Niles’ doubt that the worst is over is also extended by the fact that valuations have not yet retreated to even normal historical averages, despite how far stocks have already tumbled. For that, Niles prefers looking at a ratio of the entire stock market capitalization-to-GDP. That ratio peaked at 1.5 when the market hit all-time highs in February (even topping the tech bubble’s 1.4 reading.) Now, the same ratio has fallen to 1.1, but it is still much higher than the average since 1970 of 0.8, and still well above the financial crisis bottom of 0.6.

“Just to get to average, you would have to have the market go down 30%,” Niles said, noting that the ratio’s denominator hasn’t even yet been adjusted to reflect the expected decline in GDP, which some economists project falling by as much as 20% in the second quarter. “It is very easy to figure out the market probably goes down 30% before we’re even near fair valuation.”

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