Stock market bulls might consider this column to be a hate read, as bears have been wrong for a good nine years now.
I’m as amused as you are by perennially wrong “permabears” such as John Hussman. Why in the world would we believe his recent and predictably hysterical call for a “a market loss on the order of 60%” in the S&P 500 Index SPX, -0.55% when he was predicting the market was “overbought, overvalued, overbullish” way back in May 2010 … and seemingly every few months since then.
But don’t forget what happened at the end of the parable of the boy who kept crying wolf. Eventually, the wolf came and ate all the sheep — even if, by then, his credibility was shot.
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So at risk of simply being tuned out, thanks to the bad behavior of premature wolf-criers, it’s worth pointing out that more and more folks are worried about what’s lurking over them thar hills.
And if you’re not, Micah Wakefield of Swan Global Investments points to “risk amnesia” that has settled in over the past few years that may be to blame. And worse, if you’ve completely forgotten about the risks, you are more likely to panic when the inevitable downturn does come, he writes.
“In an industry too often focused on short-term returns, corrections can cause shortsighted reactions that negatively impact long-term plans,” Wakefield writes.
In other words, it’s worth thinking about a correction or a crash now — before it’s too late.
And a crash may be coming soon. At least, that’s what these seven experts think.
The party ends in 19 months: Almost six in 10 economists surveyed by the Wall Street Journal recently predicted the economic expansion will end in 2020 and a recession will set in. If you believe that stocks are a leading indicator, then that means you better act accordingly as soon as possible. After all, the “official” start of the Great Recession (with two consecutive quarters of negative GDP growth) was in late 2008 — and by then, the damage had been done. It would be wise, then, to start looking at your stocks with a critical eye.
“A tech bubble larger than March of 2000”: Villanova professor Keith Wright recently noted that the tech sector is even more overinflated it was in the dot-com days, owing to overly optimistic private valuations that have spawned hundreds of billion-dollar “unicorns.” “The ‘get big fast’ strategy that many investors and venture capital firms adopted will fail,” Wright says, adding, “We are now officially in a tech bubble larger than March of 2000.” He points to a National Bureau of Economic Research study that found the average billion-dollar start up is actually worth about half of its lofty initial valuation in the long run. That means recently minted IPOs like Dropbox DBX, +1.45% and Spotify SPOT, +0.74% things could get ugly real soon.
Robots run amok are a “structural issue”: This week, Goldman Sachs dusted off old arguments about the systemic risks posted by high-frequency trading — you know, the robots behind the flash crash, among other unpleasant market events. Goldman points to February’s sharp drop as the latest evidence of programmatic trading gone wrong, and sees assets including stocks but also commodities like crude as particularly vulnerable.
“The fact that even some of the biggest, most heavily traded markets appear vulnerable to flash crashes provides plenty of ex-ante reason to worry that these small cracks in the foundation may betray deeper structural issues that have simply not yet been exposed,” writes Goldman’s head of global credit, Charles Himmelberg.
That whole deficit thing: Remember when Ron Paul and other fiscal conservatives were freaking out about our deficits and national debt? Well, David Stockman, the former budget czar for Ronald Reagan, does. And back in February, he warned that the stock market crash will be “a doozy” because of a failure to rein in spending. In March, he repeated the sentiment, warning of a tax cut America “can’t afford” and remarking that aggressive borrowing this deep into a bull market (or this close to the next inevitable economic downturn, if you prefer) is going to end badly.
“The market is whistling past the graveyard,” Stockman said. “Trading at 26 times earnings at the top of the business cycle 10 years in, is almost a record.”
Higher rates mean “a drawdown of 30% to 40%”: It’s easy to pooh-pooh the impact tighter monetary policy may have on the markets, seeing as the Federal Reserve has been talking a whole lot about higher rates for over three years, back to the “liftoff” buzz of early 2015. But we are finally seeing some action, both on rates and in interest-bearing assets, with the 10-year Treasury TMUBMUSD10Y, -0.95% finally topping 3.1% for the first time since 2011. That’s good for income investors, of course, but may be painful for stock investors as cash rotates out.
As investing legend Mark Mobius recently told CNBC: “When the Fed moves, everyone else has to move in that direction.” That could result in a “quite dramatic” drawdown of 30% to 40% in equities over the short-term, Mobius warned.
Inflation could leave stocks “in worse shape than 2007”: Scott Minerd, the global investment chief at Guggenheim, bluntly warned at the end of March that “the markets are potentially on a collision course for disaster” because of full employment. While on the surface it may sound great that folks have jobs, the reality is that this is a textbook setup for rapid inflation, Minerd warns — and it will come at the worst possible time.
“To have 3.5% growth at this phase of the expansion — when we are essentially running out of labor and other factors of production are being stretched — makes it extremely hard not to see how inflation and wage pressures will pass through to the real economy,” he wrote in a note to clients. Things look fine now, but he warned that, by the end of 2019, corporate America “will be in worse shape than 2007” as all the debt they have taken on comes due even as margins are squeezed.
Housing running out of gas: While home prices continue to march higher, the reality is that record lows for inventory have been supporting prices. In fact, the CEO of housing startup Redfin noted that the lack of homes for sale is “freaking us out” in a May interview — and that coupled with tighter credit and already strong rental trends, it may not bode well for real estate.
That rhymes with a recent Zillow survey that warned an economic slump and higher interest rates could really damage the housing market, given that “affordability is a critical issue in nearly every market” and even a modest ding in family finances could put homes out of reach — and result in a serious drop in demand.