The S&P 500 has shed 500 points amid inflation fears. It’s been a punishing start to 2022. Alpesh Patel considers whether it is just a bump on the road or are we set for the stock market crash that some commentators have been predicting for years?
Stock market turbulence throughout January has caused a significant degree of alarm. Since the pandemic related drop in March 2020, stocks have risen dramatically. In just 17 months, the S&P 500 doubled. Last year, the index returned 27%. However, according to some smart money investors, the good times are over for now.
Inflation
Paul Tudor Jones, the well-known billionaire investor, believes inflation is here to stay. He thinks it’s the biggest threat to the market and society at the moment. Inflation hit 30-year highs last year, but Jones suggests that’s just the start. The Tudor Investment founder believes that the trillions of dollars of stimulus money injected into the economy will keep inflation running hot.
The legendary investor states that now is the time to look at various inflation hedges, like Treasury inflation-protected securities and commodities. He warned against fixed-income products and suggested that equities will outperform them in an inflationary environment.
High Valuations
Some smart money is less optimistic about equities. Jeremy Grantham, the co-founder of GMO, suggests we are in the middle of a “superbubble”. When Grantham talks about bubbles, people listen. He predicted the dot-com crash in 2000 and the housing crisis of 2008.
Grantham describes a “superbubble” as a scenario when prices rise more quickly than usual, followed by a narrowing of the market where blue-chips rise, but speculative stock stagnates. This picture will seem familiar to everyday investors.
In Grantham’s opinion, the U.S. market is overinflated. If his thesis bears out, the S&P 500 could drop to 2,500 points — which would be down almost half from its record highs from December 2021.
However, he believes there are plenty of opportunities out there. For example, value stocks in other markets — like the FTSE 100 — could be worth considering.
But Grantham isn’t the only expert sounding the alarm. John Hussman, president of Hussman Investment Trust, believes we have entered the most extreme financial bubble in U.S. history. And he blames the Fed.
Hussman suggests that haphazard Federal Reserve monetary policy over the last 15 years is to blame. He explains that since the beginning of the financial crisis — and especially since the pandemic — the central bank has attempted to keep interest rates low by pumping liquidity into the economy. However, with inflation nearing 40-years highs, they are moving quickly to tighten policy.
The result of this policy is the high valuations we see today. Hussman points to his favoured measure of market health: total market cap to total revenues, indicating extreme valuations. Further to that, he indicates that the S&P 500 will have to drop by 70% to reach normal valuations.
Ray Dalio at Bridgewater Associates is similarly bearish about U.S. equities. His top three holdings are emerging market ETFs, suggesting a pivot away from the American market.
Wall Street guru Warren Buffett doesn’t seem too fazed by recent market problems. His advice is to concentrate on the long-term. However, he has been selling more than buying. Some people feel that could indicate that he sees a market crash brewing. Alternatively, he might be freeing up some capital for something else.
Other Headwinds
Of course, inflation and high valuations aren’t the only things that could affect stock prices throughout 2022. In fact, there are plenty of events that could hit the market.
New COVID-19 variants are contributing to an uncertain landscape. Economies are showing resilience and recovering, but new strains could cause issues.
Politics could also throw a spanner in the works this year. For starters, the stopgap funding bill agreed in December only applies until February 13th. The ideological differences between the parties could make another government shutdown possible.
Additionally, with midterm elections due in November, majorities for either party could hurt the market. If the Democrats strengthen their hand, corporation taxes could increase. However, if Republicans win more seats, it could kill Biden’s Build Back Better program.
Further afield, China’s tech crackdown could hurt U.S. equities. Weakening of the Chinese market could hurt innovation and the supply chain, with negative downstream consequences for U.S. stocks.
Finally, this could all come down to history repeating itself. In the last eight bear markets since the 1960s, the road to recovery has featured a 10% market correction three years after the bottom. We haven’t hit that point in the 22 months since the pandemic crash, but it could be around the corner.
Alpesh Patel OBE
If history repeats itself then the USA markets will be rising with modest corrections/pullbacks throughout and up into the mid 2030’s – yes there should be recessions within, but there should not be the types of crashes all those experts have been spouting on about – There will be “technical” bear markets within the cycle, but it shouldn’t be like the 2000-2009 period – quick 1987 or 1990’s sideways style corrections are acceptable and expected
But I don’t think we’re in a super bubble
WD Gann produced a Financial Timetable in 1909 which was pretty accurate, but not exact, that was based on a 18.6 yr cycle of the North Node of the moon – timed the 1982 low, the 1987 crash, 2000, 2008 amongst many others before – which if we tallied up all the experts opinion the timetable probably out performs them on success of predictions and that’s from a published document from 1909 – 113 years ago
Next is for commodity prices to top (again if you know the cycle they work too, the last 2 years price movements are not out of the blue) and Interest rates to head back to the mean of 5% ish both UK and USA
For traders, the good times are never over, in bull, bear or sideways markets offer excellent opportunities
For Investors, well that’s a different story if a moderate market correction is happening and one of the risks of being a long term Investor – not all of us who use sharescope are Investors
For all anyone knows (me included) the market could continue rising, go down or just trend sideways – its going to be one of those scenarios,
For 2022 I only have one Time Cycle [TC] date which is 04th April 2022 (+ or – one week either side) – specific to the USA markets – it might cause some volatility or it might not be applicable – Soon see – the perfect scenario would be a multi-month correction down into key retracement levels 50%+ into the date and if its an active time cycle the market should bounce convincingly from (If the market is rising and the TC is active then we’d expect it to top out) – as no-one in the world knows exactly what is actually going to happen, you wait for the date, watch the market and then trade if a trading set-up appears, if no set-up shows up you simply do nothing
THT
and whey hey – turning point as predicted – posted here 2 months prior but have had on my charts since 2017 –
Be really interesting to see how the “1987” cycles (yet to arrive) interact with the market when they do
The “key” to Inflation is knowing if you’re in a Deflationary or In Inflationary long-term cycle – once you work that out the vast majority of market direction along with the economic activity it should contain within can be predicted – including Inflation, Again itemising the commodity cycle would have had any self-respecting trader looking for longs in early 2020 – 2022 should see the topping out of said cycle and falling commodity [soft] prices – shorting opportunity