Near-term investing thoughts: No recession this year, but perhaps a “Black Monday”

by MetricT

There appear to be two schools of wildly-diverging thought among investors right now, and I’ve been thinking how to bridge the two camps, since I can’t imagine them being both so incredibly wrong given the amount of money on the line.

On the pessimists side are numerous successful investors (Ray Dalio, Jeremy Grantham, Charlie Munger, Michael Burry) who believe stocks are in a massive bubble. The Buffett Indicator and Shiller PE both say the stock market is highly overvalued. Even though I likewise believe we’re in a massive bubble, those indicators give little information about timing, and they could conceivably keep inflating for some time.

On the optimists side is the bond market, where the yield curve is normal and not inverted, and showing signs of modest short-term inflation. With the Fed’s foot firmly on the gas pedal and with a massive fiscal stimulus working its way through Congress, the odds of a recession related to the business-cycle or Fed overtightening this year is basically zero, though some shock like war or natural disaster could come out of left field.

But we’ve seen instances where the stock market crashed even when the real economy kept on growing. The best example in my lifetime is the “Black Monday” crash of October 19, 1987. The S&P 500 dropped 20% in a day, but the real underlying economy (as measured by GDP) kept chugging right along.

My suspicion is that something similar to a “Black Monday” will play out this year. The stock market, or at least the overvalued sectors of it, will crash and wipe out a lot of paper wealth, but the underlying economy will keep strengthening in the short term.

In the long-term I suspect we’ll have a massive crash once fiscal stimulus tapers off, or we’ll admit that the US economy is “going Japanese” and continue passing repeated fiscal stimulus as long as that’s viable.



Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.


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