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Paul Dietrich of B. Riley Wealth said pouring cash into this type of stock market could be a “mistake.”
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Inflation has calmed down from its highs, but all is not well in the “wonderland” economy.
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Dietrich said in a note that a mild recession could cause the S&P 500 index to fall by more than a third.
The stock market is driven not by fundamentals but by investors' emotions and fear of missing out, and a recession could cause the S&P 500 index to fall by up to 30%.
That's according to Paul Dietrich, chief investment strategist at B. Riley Wealth Management, who has previously warned that a recession and bear market could hit the economy this year.
Stock prices continued to rise into 2024, and the S&P 500 index recently exceeded the 5,000 mark for the first time in history. But Dietrich warns that this kind of stock market investment is always a “mistake.” Because it's largely fueled by investor hype.
“So many investors are caught up in the Kentucky Derby-like excitement, momentum and frenzy of the stock market,” Dietrich said in a note last week. “This behavior is driven by an irrational 'fear of missing out' (FOMO). ”
Dietrich added that a closer look beneath the surface shows that all is not well in the “wonderland” economy.
Unemployment is near historic lows but has risen steadily over the past year as more companies issue pink slips. Layoffs and layoffs rose slightly in December to 1.6 million, according to the Bureau of Labor Statistics.
While consumer spending remains strong on paper, there are signs that Americans are simply financing purchases with credit card debt to combat rising inflation. Household debt now stands at an all-time high of $17.5 trillion, according to data from the Federal Reserve.
“In 2000 and 2008 as well, most consumers reached their credit limits and consumer spending declined dramatically. This situation is not going to end well,” Dietrich warned.
Retail sales posted their steepest decline in nearly a year on Thursday, suggesting consumer resilience may finally be wearing thin.
Dietrich also pointed out that although inflation has cooled dramatically from its highs, it hasn't actually been a problem during recessions over the past 25 years. That means the economy, and the stock market, are not always in the clear.
“Inflation can make the pain of a recession even worse, but even without inflation, the stock market can fall by half during a recession,” he warned, adding that at the start of a recession He noted that the S&P 500 index has fallen an average of 36%.
“Even in a mild recession, investors in the S&P 500 should expect to lose more than a third of their retirement stock investments,” he warned.
Other bears on Wall Street are warning of a coming recession that could derail the stock bull market. According to one economic model, there is an 85% chance of a recession in 2024, the highest probability since the Great Financial Crisis of 2008.
However, investors remain fairly optimistic about the market. According to the latest AAII Investor Sentiment Survey, 42% of investors are bullish about stocks over the next six months. Meanwhile, markets still expect the Fed to cut rates aggressively by the end of the year, with a 68% chance of the rate cut being at least 1 basis point in full, according to the CME FedWatch tool.
Read the original article on Business Insider
