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Why the stock market's rout could be far from over -- Jim Bianco

edited March 5 in Off-Topic
This is a "back of the envelope" look at where the market may be headed that makes some sense to me. It is presented in fairly straightforward terms. Here are a couple of excerpts:
“If you believe the market... there is an expectation of a severe economic disruption coming in the form of school closures, no large gatherings, widespread business closures, and everything else,” Bianco said on The Final Round on Wednesday.

“....the old 20 P/E is now going to be a 12 to 15 P/E,” Bianco said. “That means the market's going to go down 20% or 30%. Alright, it went down half that – around 10% or 15% so far. So we're about halfway there right now.”

Here is a link to the article.

https://finance.yahoo.com/news/stock-market-could-fall-10-20-percent-james-bianco-131053002.html

Comments

  • Thanks davfor.

    I still remain in the "disruptive" mode thinking camp with our investments. Covid-19 and the implications going forward will continue.
  • Again, I agree. Another disrupter might be the cashing out of stock holdings by the boomer generation as they seek to preserve what they hold.

    Other sources have mentioned that most of the rise in the S&P 500 over the last 6 months or so has been fueled by stock buybacks by the companies that were given huge tax cuts recently. Remember how we were all told about the need for those tax cuts in order to create all manner of new jobs and increased production and so on and so forth. I fail to see much evidence of any of that occurring and you can't blame that on COVID-19. That activity predates the virus.
  • Mark said:

    Remember how we were all told about the need for those tax cuts in order to create all manner of new jobs and increased production and so on and so forth. I fail to see much evidence of any of that occurring and you can't blame that on COVID-19. That activity predates the virus.

    My kids can find all sorts of opportunities at 19.5 hours a week. And there's always gig work. Right?
  • So they say. Good luck getting affordable loans, mortgages etc. with that much less keeping up with everything else. Some do I'm told but far, far too many don't.
  • edited March 5
    .
  • edited March 5
    @Mark said: Another disrupter might be the cashing out of stock holdings by the boomer generation as they seek to preserve what they hold.

    @Mark There appears to be a lack of good investment alternatives. I wonder where those boomers will invest that cash. Or are you suggesting they might just sit on it until some time after the dust settles?????
  • edited March 5
    At least a partial answer to the question I posed to @Mark has occurred to me. It makes sense that seniors who have invested in stocks primarily for the dividends they offer (and have not seriously considered their volatility) may cash out when they see their account balances take a noticeable hit. Also, some seniors who have been riding the stock market wave over the past decade or so may review their situations, decide they "have enough", and cash out for good. And, some senior stock market investors who have been lured into complacency by benign market conditions may simply "panic" and cash out without having formed a plan about what to do next.
  • Any one of those are possible @davfor. It may also be just a transfer of assets as the boomers pass away and who knows what the inheritors of their accounts/estates do with their new found wealth. Many research reports on that matter say that it isn't pretty most of the time.

    If the boomers just sell to be out of equities I'm guessing many of them will either buy annuities or bonds, bond funds and possibly CD's or treasuries despite the low returns. It gives many comfort just being able to see their stack of cash not being whittled away by market downdrafts.

    These are all just my best guesses, I have no clue honestly.
  • I think the major issue is the evaporation of the optimism that was required to elevate stocks to historically unusual levels for the third time in the last 20 years.

    Shiller's CAPE, Tobin's Q, Buffet's Yardstick, you name it; you can't say we weren't warned about the avalanche conditions.
  • edited March 5
    After watching markets for decades and looking for many signs I still can't find any that can predict market crashes in the next weeks and even months. PE,PE10(Shiller),Bogle,Arnott,GMO, inverted yield and other can all be off by years and why I never used them. GMO used to be a pretty good source until 2007-8 but when the Fed interfere their forecast was hugely off by years.
    Stocks had one of the longest bull markets and they will correct. Most investors, including most retirees that don't have enough, will have to be in stocks.

    There are several bonds funds, mainly in Multi sector + NonTrad that can still make 4-5% with a yield higher than 4% and thankfully are not discussed in most articles and the media. PIMIX is huge and famous but the rest of them are still small.

    and of course, you can own FI CEFs like PCI which beat SPY since 2016 (when PCI started their new style to be closer to PDI) for performance, SD, Sharpe, Sortino and can be a better option with yield over 8%.
    PCI vs SPY vs VT (link). VT is another proof why diversification didn't help you.

    Probably, the easiest way and especially for accumulators is to select an asset allocation to march their goals and rebalance when it's off by 5%.
    For retirees who have enough, Kitces and Pfau (link) concluded: "Declining equity glide paths do not necessarily help support retirement success. Static allocations generally fare worse than more conservative starting allocations that rise in equity exposure throughout retirement. Depending on the underlying assumptions, the optimal starting equity exposures are generally around 20 percent to 40 percent and finish at around 40 percent to 80 percent."
  • @FD1000 : A question ,when you have time. Do you have back-up plan if Fed keeps dropping interest rate. I came across article in WSJ, Tue. or Wed. which laid out that question.

    Thank you, Derf
  • CAPE ratio still, today, higher than ever except for 1929 and 2000

    wild
  • So something hinky is going on. A 900 point rally in 20 minutes on a Friday smells like rubbish. Oil down 10% today. Bond yields crashing and more rate cuts, possibly three in the next 6 weeks. Any of you looking at oil or airlines yet?:)
  • parsig9 said:

    So something hinky is going on. A 900 point rally in 20 minutes on a Friday smells like rubbish. Oil down 10% today. Bond yields crashing and more rate cuts, possibly three in the next 6 weeks. Any of you looking at oil or airlines yet?:)

    Maybe next Monday.;-)

    I'm glad I emphasized high quality, and shorter durations, when I rebalanced my retirement account to about 50-40-10 from 70-20-10 this past December.

    This article from Bloomberg (via Yahoo) seems to indicate that the panic is spreading into bonds:
    (Bloomberg) -- Anxiety about an emerging liquidity crunch is roiling global bond markets.

    A key gauge of banking-sector risk, known as the FRA/OIS spread, soared to its highest level in almost two years, while dollar swap spreads widened, suggesting stresses in U.S. markets are becoming increasingly severe. Here are five charts to watch for further angst:

    The two-day blow-out in the FRA/OIS spread -- a U.S. money-market benchmark that measures the difference in rates between forward-rate agreements and overnight index swaps -- shows increased perceptions of interbank lending risk or dollar hoarding. The gauge jumped from around 12 basis points at the end of February to over 50 basis points Friday, before paring.
    Just this morning M* was pondering stock correlations moving to one.

    Will bonds join in? They will if people begin to doubt whether they are liquid.

    I'm leaving the taxable account alone. That's for the kids to enjoy when the time comes. However, there's plenty of cash for the next time prices appear reasonable. FOMO is not a problem I have when I look at over-valued markets.


  • davfor said:

    At least a partial answer to the question I posed to @Mark has occurred to me. It makes sense that seniors who have invested in stocks primarily for the dividends they offer (and have not seriously considered their volatility) may cash out when they see their account balances take a noticeable hit. Also, some seniors who have been riding the stock market wave over the past decade or so may review their situations, decide they "have enough", and cash out for good. And, some senior stock market investors who have been lured into complacency by benign market conditions may simply "panic" and cash out without having formed a plan about what to do next.

    Question: What % do you think of all investors are retail investors? Thus, if seniors, etc cash out would make any dent in the market.
  • edited March 7
    @Starchild That is part of what I have been wondering about. A quick google search suggested about 30% of trading volume may be done by individual investors. Another search indicated 15% of the population was 65+ in 2015 with that percent expected to increase to 20% by 2030. A third quick search turned up this chart of household wealth by age group:

    image

    The skewing of wealth in favor of the older age groups shown in that chart has probably increased significantly since 2016 due to the continued bull market in stocks and real estate. Also, most of the stock market wealth is likely held by the average wealth households rather than median wealth households. That suggests the older households hold the vast majority of the stock market wealth held by households.

    Based on the above quick and dirty look, I suspect a sudden withdrawal by seniors from the market would at least put a meaningful dent in it.
  • Interesting chart. It says the average 18-24 year old has $94,000 in wealth. Given that $4,393 is the median, there must be a few very rich mommy and daddy's giving their kids a pretty good starting bank account to skew the difference between median and average so big.

    @davfor, I assume this is total household wealth (savings, home equity, other stuff)? Do you know? If so, I would think a bigger proportion of the gray-hair wealth might be in their home value, less in stocks and maybe the younger crowd less home equity, more investment equity. I don't know. Lots of interpretations can be made from the chart.

  • edited March 7
    @MikeM The caption got left off but reads "Average and Median Net Worth by Age Range, 2016. (Includes primary home equity.)" A search for SCF data turned up this info: "The Survey of Consumer Finances (SCF) is normally a triennial cross-sectional survey of U.S. families. The survey data include information on families’ balance sheets, pensions, income, and demographic characteristics." That says its based on household balance sheet data. So, it sounds like it includes the equity in most assets but for some reason it may omit non-primary home equity.

    There is a chart in the first link that shows "Average Net Worth by Age (Not Including a Primary Home)"

    https://dqydj.com/net-worth-by-age-calculator-united-states/

    https://federalreserve.gov/econres/aboutscf.htm
  • edited March 7
    Derf said:

    @FD1000 : A question ,when you have time. Do you have back-up plan if Fed keeps dropping interest rate. I came across article in WSJ, Tue. or Wed. which laid out that question.

    Thank you, Derf

    I always have a plan while it's working and if not I changed and I always found one. Since retirement, the plan is to invest in bond OEFs + trading riskier stuff short term.
    Most articles, analysts, papers hardly ever discuss Multisector funds and the securitized bond category where you can find funds with yields over 4% and the possibility to make 4-5% average annually. They always discuss treasuries

    And most never discuss CEFs. PCI beat SPY since it's the new mandate in 2016(similar to PDI) for performance+volatility + yield over 8%.
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