A reversion to the mean in U.S. stock prices could mean the market will fall by at least 20%, according to David Rosenberg of Gluskin Sheff and Associates, who gave his prediction at the Strategic Investment Conference 2018 in San Diego.
Rosenberg, the chief economist and strategist at Toronto-based Gluskin Sheff, said this is one of the strangest securities-market rallies of all time. That’s because all asset classes have gone up, even ones that are inversely correlated.
He thinks a breaking point is a year away, and so investors should start taking precautions now.
Smart money pulls back
The beginning of this year started off great for investors. The S&P 500 Index SPX, +0.17% hit record highs at around 2,750 points, and stocks had their best January since 1987.
As if that was not enough, Rosenberg pointed out, many Wall Street strategists raised their target to 3,000. The media extrapolating record returns only added to the rise in investors’ unreasonable expectations.
However, increasingly more hedge fund managers and billionaire investors who timed the previous crashes are backing out.
One of them is Sam Zell, a billionaire real estate investor, whom Rosenberg says is a “hero” of his. Zell predicted the 2008 financial crisis, eight months early. But, essentially, he was right. Today, his view is that valuations are at record highs.
Then we have Howard Marks, a billionaire American investor who is the co-founder and co-chairman of Oaktree Capital Management. He seconds Zell’s view that valuations are unreasonably high and says the easy money has been made.
“And I don’t always try to seek out corroborating evidence. But there are some serious people out there saying some very serious things about the longevity of the cycle,” said Rosenberg.
Big correction coming
Later at the Strategic Investment Conference, Rosenberg shifted from quoting high-profile investors to showing actual data, which paints the same ominous picture.
For starters, Rosenberg pointed out that only 9% of the time in history have U.S. stocks been so expensive.
Then he showed a table with gross domestic product (GDP) growth figures in the last nine bull rallies. This table reveals a dire trend where each subsequent bull rally in the last 70 years generated less GDP growth. Essentially, that means we are paying more for less growth.
According to Rosenberg’s calculations, the S&P 500 should be at least 1,000 points lower than it is today based on economic growth. In spite of this, equity valuations sit at record highs.
Another historically accurate indicator that predicts the end of bull cycles is household net worth’s share of personal disposable income.
As you can see in the chart below, the last two peaks in this ratio almost perfectly coincided with the dot-com crash and the 2008 financial crisis.
Now the ratio is at the highest level since 1975, which is another sign that reversion is near.
Rosenberg, the chief economist and strategist at Toronto-based Gluskin Sheff, said this is one of the strangest securities-market rallies of all time. That’s because all asset classes have gone up, even ones that are inversely correlated.
He thinks a breaking point is a year away, and so investors should start taking precautions now.
Smart money pulls back
The beginning of this year started off great for investors. The S&P 500 Index SPX, +0.17% hit record highs at around 2,750 points, and stocks had their best January since 1987.
As if that was not enough, Rosenberg pointed out, many Wall Street strategists raised their target to 3,000. The media extrapolating record returns only added to the rise in investors’ unreasonable expectations.
However, increasingly more hedge fund managers and billionaire investors who timed the previous crashes are backing out.
One of them is Sam Zell, a billionaire real estate investor, whom Rosenberg says is a “hero” of his. Zell predicted the 2008 financial crisis, eight months early. But, essentially, he was right. Today, his view is that valuations are at record highs.
Then we have Howard Marks, a billionaire American investor who is the co-founder and co-chairman of Oaktree Capital Management. He seconds Zell’s view that valuations are unreasonably high and says the easy money has been made.
“And I don’t always try to seek out corroborating evidence. But there are some serious people out there saying some very serious things about the longevity of the cycle,” said Rosenberg.
Big correction coming
Later at the Strategic Investment Conference, Rosenberg shifted from quoting high-profile investors to showing actual data, which paints the same ominous picture.
For starters, Rosenberg pointed out that only 9% of the time in history have U.S. stocks been so expensive.
Then he showed a table with gross domestic product (GDP) growth figures in the last nine bull rallies. This table reveals a dire trend where each subsequent bull rally in the last 70 years generated less GDP growth. Essentially, that means we are paying more for less growth.
According to Rosenberg’s calculations, the S&P 500 should be at least 1,000 points lower than it is today based on economic growth. In spite of this, equity valuations sit at record highs.
Another historically accurate indicator that predicts the end of bull cycles is household net worth’s share of personal disposable income.
As you can see in the chart below, the last two peaks in this ratio almost perfectly coincided with the dot-com crash and the 2008 financial crisis.
Now the ratio is at the highest level since 1975, which is another sign that reversion is near.
What the Fed thinks
As another strong indicator that recession is around the corner, Rosenberg quoted the Federal Reserve Bank of San Francisco. He pointed out that, having access to tons of research, they themselves admit that equity valuations are so stretched that there will be no returns in the next decade:
“Current valuation ratios for households and businesses are high relative to historical benchmarks … we find that the current price-to-earnings ratio predicts approximately zero growth in real equity prices over the next 10 years.”
Basically, the Fed is giving investors an explicit warning that the market will “mean revert.”
As another strong indicator that recession is around the corner, Rosenberg quoted the Federal Reserve Bank of San Francisco. He pointed out that, having access to tons of research, they themselves admit that equity valuations are so stretched that there will be no returns in the next decade:
“Current valuation ratios for households and businesses are high relative to historical benchmarks … we find that the current price-to-earnings ratio predicts approximately zero growth in real equity prices over the next 10 years.”
Basically, the Fed is giving investors an explicit warning that the market will “mean revert.”
by Oliver Garrett, MarketWatch | Read more:
Images: Haver Economics/Gluskin Sheff
[ed. See also: Why I Think the Stock Market Cannot Crash in 2018]
[ed. See also: Why I Think the Stock Market Cannot Crash in 2018]
