The drastically slowing economy is threatening both corporate earnings growth and the bull market. If GDP grows at an anemic 2% average annual rate through 2019 and a 1.8% rate longer term, as forecasted by the Federal Reserve (per the Wall Street Journal), stock prices are likely to lose steam and tumble. Five famed investors see a bear market around the corner, and recently gave their views on how the downturn will begin and how low it might go, as reported by Money.com, a division of Time Inc. The five include Tom Forester, Jim Rogers, Marc Faber, Bill Gross and Rob Arnott.
Tom Forester, Forester Capital Management
Forester is the founder and chief investment officer of the firm that bears his name. He finds nearly every S&P industry sector to be overvalued, and points out that the last two market crashes were sparked by the bottom falling out of a single sector. In the year 2000 it was technology, and in 2008 it was financials. In 2008, he radically reduced his exposure to bank stocks to 5 percent of his portfolio ahead of the crash at a time when financial stocks made up 20% of the S&P 500 index. His prescient move allowed his fund to become "the sole long-only mutual fund in the U.S. to gain in 2008," per Institutional Investor as quoted by Money.
Backing up Forester's view, Money cites data from FactSet Research Systems Inc. showing 9 of the 10 S&P industry sectors have higher multiples than their 10-year averages, the lone exception being telecommunications. In the next bear market, "There won't be anywhere to hide on the way down," Forester told Money.
Jim Rogers, Investor and Financial Commentator
Rogers gained fame as the co-founder, with George Soros, of the Quantum Fund. He has been a frequent interviewee or panelist for financial publications and news programs. Rogers shorted stocks of Wall Street investment banks ahead of the 2008 crash, Money says. Back then, high debt loads were a catalyst for the crash. Today, Rogers points out that debt loads are vastly bigger, notably in the U.S., China and the Federal Reserve. Regarding the magnitude of the upcoming crash that he anticipates, Money quotes Rogers, age 74, as warning, "It's going to be the biggest in my lifetime."
Marc Faber, Investor and Newsletter Author
Swiss-born Marc Faber, now a resident in Thailand, holds a PhD in economics and is an investment advisor and fund manager through his firm, Marc Faber Ltd. He also writes a monthly investment newsletter, "The Gloom, Boom and Doom Report." As Money notes, Faber is consistently bearish, and frequently is called "Dr. Doom." He sees two big red flags right now.
First, more NYSE stocks are bought on margin now than at any time since the 1950s, and Faber interprets this as a sign of overvaluation. Indeed, he finds that stock prices are "out of control," per Money, with the market P/E ratio nearly double its historical average. Once a selloff begins, Faber expects it to become an avalanche in which "asset holders will lose 50% of their assets [and] some people will lose everything," as Money quotes him.
Second, Faber says "The market isn't healthy" because only a small number of stocks are driving the major indexes upward, per Money. "We have a bubble in everything," he told CNBC. However, in an earlier CNBC segment, Faber was castigated by another guest for consistently forecasting a market crash since 2012. (For more, see also: Why the S&P 500 Is Healthier Than It Looks.)
Bill Gross, Fixed Income Manager, Janus Capital Group
Bill Gross co-founded Pacific Investment Management Co. LLC, or PIMCO, where he earned a reputation as a particularly savvy bond fund manager. He now does the same in his position at Janus Capital Group Inc. Money cites Gross as another big-name investor who predicted the 2008 crash, raising a cash hoard of $50 billion to cover potential counter party claims against PIMCO.
Gross is alarmed by a financial economy that is growing faster than the real economy, Money says. He's also concerned about huge debt loads, an aging population, the automation of labor and weak productivity growth in the real economy, Money adds. All these factors "promise to stunt U.S. and global growth far below historical norms," Gross believes, per Money. Right now, "All markets are increasingly at risk," as Money quotes from Gross' June Investment Outlook letter. (For more, see also: Bill Gross: QE is "Financial Methadone.")
Rob Arnott, Smart Beta Guru
Arnott is founder, chairman and CEO of Research Affiliates LLC, an investment advisory firm. Dubbed the "godfather" of smart beta investing, per Money, he also is a portfolio manager for PIMCO. In 2007, Arnott foresaw the coming recession that would become known as the Great Recession, the biggest downturn since the Great Depression of the 1930s. Arnott says stocks are simply too expensive and that there is no reason for longterm investors to be optimistic. "In the United States, there's not enough fear...One bad thing could cause a downturn...The market is just too expensive...At any point it might roll over and die," Money quotes him as saying.
Reasons For Cautious Optimism
There are many people who don't agree with these bears. PIMCO analyst Joachim Fels, for one, finds a recession to be unlikely over the next 12 months, Barron's reports. However, he adds that a global recession within the next five years has a 70% probability, based on history. Barron's also notes that the forecasting prowess of Jim Rogers and Marc Faber is questionable. They have been wrongly bearish for years, and those who followed their advice in the recent past would have missed out on the bull market. Additionally, Barron's notes that Nobel Prize winning economist Robert Shiller of Yale University, whose models indicate an overpriced market, nonetheless believes that stocks may climb yet higher. (For more, see also: Stocks Could Rise 50%, Says Yale's Shiller.)