This Market Bubble is Getting Dangerous | The Mesh Report

This Market Bubble is Getting Dangerous

Dividend Sensei December 16, 2020 Comments Off on This Market Bubble is Getting Dangerous

The stock market is always climbing a wall of worry, even in the roaring 90’s.

 (Source: Michael Batnick)

Since 2009 and 1945 we’ve averaged a 5+% pullback or correction in the S&P 500 every six months.

  • this is the approximate frequency of market pullbacks that is likely to persist for the foreseeable future
  • the cost of owning the best performing asset class in history
  • smart long-term investors (DK members) harness this short-term volatility for their benefit

What makes up the Wall of worry today? Here’s a survey from Deutsche Bank.


(Source: Lance Roberts)

The current Wall of Worry consists mainly of vaccine/pandemic related potential bad things happening and insufficient fiscal and monetary stimulus.

  • these short-term risk factors are the potential catalysts for flipping Wall Street from “risk-on” to “risk-off”.

In the short-term no-one can predict the stock market, because just 8% of returns are a function of fundamentals, according to JPMorgan.

Moody’s, a blue-chip economist/analyst firm, has a base case forecast predicting a multi-year bear market beginning in early 2021

Goldman Sachs, another blue-chip economist/analyst firm, predicts stocks will rally to 4,600 on the S&P 500 (up 25%) by the end of 2022.

JPMorgan, another blue-chip economist, thinks stocks could hit 4,600 by the end of 2021.

Bank of America, another blue-chip economist, thinks stocks will post modest gains that disappoint many.

Bank of America expects global GDP to grow 5.4% in the next year, while the US economy grows 4.5%. The S&P 500 will rise roughly 5% to 3,800, and the 10-year Treasury yield will climb to 1.5%, according to the firm’s outlook note.” – Business Insider

All four of these economist/analyst firms are among the 16 most accurate out of 45 tracked by MarketWatch. How can they differ so greatly in their forecasts for the stock market?

Because forecasting the short-term future is nearly impossible.

According to JPMorgan, just 8% of 12-month stock returns are a function of fundamentals, meaning earnings growth and valuations. You can see that by how wide the 12-month return range is since 1995. By five years the range gets much narrow, with 44% of returns a function of fundamentals.

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