Rosenberg: S&P "Should Be 1000 Points Lower Than It Is Today"
According to Rosenberg’s calculations, the S&P 500 should be at least 1,000 points lower than it is today based on economic growth. In spite of this, equity valuations sit at record highs.
Another historically accurate indicator that predicts the end of bull cycles is household net worth’s share of personal disposable income.
As you can see in the chart below, the last two peaks in this ratio almost perfectly coincided with the dot-com crash and the 2008 financial crisis.
Now the ratio is at the highest level since 1975, which is another sign that reversion is near.
What the Fed thinks
As another strong indicator that recession is around the corner, Rosenberg quoted the Federal Reserve Bank of San Francisco. He pointed out that, having access to tons of research, they themselves admit that equity valuations are so stretched that there will be no returns in the next decade:
“Current valuation ratios for households and businesses are high relative to historical benchmarks … we find that the current price-to-earnings ratio predicts approximately zero growth in real equity prices over the next 10 years.”
Basically, the Fed is giving investors an explicit warning that the market will “mean revert.”
But when we revert, we don’t stop at the mean, warned Rosenberg. He gave an example of how mean reversion in the household net worth/GDP ratio would create a snowball effect.
According to his calculations, if the household net worth/GDP ratio reverted to the mean, savings rates would go from 2% to 6%. As a result, GDP would go down 3%, which would have nasty consequences for the economy and, in turn, stocks.
Monetary regime change
Stretched valuations are not the only problem for the stock market. Rosenberg thinks that new Fed Chairman Jerome Powell marks the end of low interest rates, which will also add pressure to equities.
Even the biggest Fed doves admit that low rates created a heightened risk of asset bubbles and unstable asset inflation. And so, Rosenberg thinks, Powell will be more hawkish than people think.
“He’s [Jerome Powell] talked about risk-taking in the past, he’s talked about frothy financial conditions. He was adamantly against the prolonged period of zero percent interest rates. He was profoundly opposed to the repeated rounds of QE [quantitative easing], and now he’s in charge. So, for people to think he’s only going to go three times this year [raise official interest rates three times], I think he’ll go four. He may go more, depending on the circumstances.”