Will The Stock Market Fall Further?

Right now, the U.S. stock market looks like a marriage breakdown.

But is it just a separation or a full-blown divorce?

For us, the writing has been on the wall for a while.

In October, we hosted a webinar called ‘How To Profit in a Falling Market’. The basic thesis of that webinar was we believed the US market was significantly overvalued and due for a correction. We also had concerns about an imminent rise in US interest rates as well.

By comparison, we believed the Oz market was still fair value. i.e it wasn’t cheap, but it wasn’t overly expensive either.

And now, almost four months after the webinar, financial markets are in a spin wondering what to make of the recent sell off on the U.S. stock market.

For the sake of brevity, I’m not going to get bogged down in employment numbers, interest rates and all that other whatnot. We can discuss that some other time with a cute little diagram that is so simple you could hang it above the kid’s beds.

Right now, the only question on everyone’s lips is…

Will the Market Fall Further?
To help put everything into perspective, I’ve included the following diagram from our webinar.

What the above shows is the following.

During the GFC, Australia experienced a worse correction than the US in relative terms because we were coming off a ‘higher high’ thanks to the mining boom. (Remember that, painters and cooks working in the mines were on starting salaries of $150k pa! I should’ve had a go myself).

Therefore, our correction was greater in percentage terms. (BTW, you can be forgiven for thinking the US came off a ‘higher high’ because of all the noise they made!)

However, post the GFC, the US have experienced a much stronger recovery than Australia. Consequently, 10 years later, the US are now where we were when the GFC hit. i.e. at nose bleed levels.

But, the question remains…

Separation or Divorce?
The narrative coming out of the U.S. now is, “…the fundamentals are good”.

Our narrative (Suncow’s) is, “… things are better than they were, but the US are still sitting on a mountain of debt!”

As such, this is how we see the stock market playing out over the next period. The following diagram is our 10 yr summary of the Dow Jones.

The above diagram is deliberately simple to help demonstrate one very important point – the ‘breakaway gap’.

Thankfully, these breakaway gaps are quite rare. In fact, so rare the last time I saw one was just before the GFC and prior to that, the dot.com boom/bust.

The best way to think of a breakaway gap is like a marriage breakdown. And it works like this…

Meet John and Jenny.

John and Jenny have enjoyed a rock-solid marriage for the past 10 years and then one day, Jenny finds out John was snogging her best friend at a party. Understandably, Jenny is mortified and so she walks out on John (breakaway).

About a week later, Jenny convinces herself it was ‘just a kiss’ and so she returns home to John thinking she can salvage her marriage. (she closes the gap between her and John)

Not long after Jenny returns home, she finds out it was more than ‘just a kiss’! She is absolutely devastated and feels betrayed.

By now, John is on the front lawn trying to gather the last of his belongings. The best he can hope for is to find a pair of undies that haven’t been cut in half or the toes cut out of his socks. There’s no coming back for John! It’s a divorce for sure.

And that’s what I expect from the US market very shortly. The market will retrace its steps back up to 26,000 points to ‘close the gap’, and then the next drop will be bigger than the first. I’m expecting the U.S. market to drop 6,000 – 8,000 points over the next 12 months. (Approx. 30%)

As for the Australian market, it will get pushed around a bit, but it won’t be anything like what I’m expecting out of the US. It could be costly and nasty for the US.

Just ask John.

Have a great week!

Adam

p.s. sorry about the images being a bit blurred, we’ll get them touched up shortly. I just wanted to get this post up.