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Stocks Will Sink Further, Economist Rosenberg Says

'We always believed these past two years represented a fake bull market, built on sand, not concrete,' the prominent economist David Rosenberg says.
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Stocks are slumping, with the S&P 500 down 18% year to date. And prominent Wall Street economist David Rosenberg says the carnage isn’t over.

“We always believed these past two years represented a fake bull market, built on sand, not concrete,” he wrote in a commentary on MarketWatch. “We also remain steadfast of the view that the inflation scare is going to pass very soon.”

Among the bearish factors are a “collapse” in money-supply growth and the reversal of fiscal policy from “radical stimulus to restraint that would cause the remnants of the Tea Party to blush,” said the president of Rosenberg Research.

A recession, accompanied by a 20% drop in profits, “is the next shoe to drop,” he said.

Rosenberg said the S&P 500 could ultimately slide to 3,300. That’s 15% below the recent quote of 3,878 and 31% beneath the Jan. 3 record of 4,797.’s Bearish Scenario on May 23 laid out its own case for further stock-market weakness.

The reasoning: Even after the market slide, valuations remain lofty. The S&P 500’s forward price-to-earnings multiple stood at 16.4 as of May 20, according to FactSet. That’s above the 20-year average of about 15.7.

Stocks have generated returns far in excess of their historical averages in recent years, so a simple reversion to the mean -- jargon for a return to the average -- would likely entail subpar returns for years.

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The S&P 500 has returned an annualized 13.88% over the past 10 years, according to Morningstar. That compares with 10.67% for the period from 1957 through Dec. 31, 2021, according to Moneychimp. The index was bumped up to 500 stocks in 1957.

The rampant inflation coursing through the economy is another negative for stocks. Consumer prices soared 8.3% in the 12 months through April. Walmart  (WMT) , Target  (TGT)  and other companies said their first-quarter earnings were hurt by inflation, as consumers struggle to afford products that have increased in price.

Rates and Recession

Rising bond yields and the Federal Reserve’s interest-rate hikes also are bad for stocks. The 10-year Treasury yield has surged 1.23 percentage points this year to 2.74%. The Fed has lifted rates 0.75 percentage point starting in March, and a lot more is expected.

Higher rates mean companies pay more to borrow, which damps their ability to invest. Higher rates make borrowing more expensive for consumers, too, crimping their buying power.

There’s also a high chance for recession over the next two years, Rosenberg said.

At no time in the past 65 years has inflation stood above 4%, unemployment stood below 5%, and the economy didn’t enter recession within the next two years, according to the Harvard economist Larry Summers. Unemployment registered 3.6% in April.

Except for brief periods, what we’ve seen so far this year doesn’t even amount to a bear market for stocks, which is defined as a drop of at least 20%. 

The S&P 500 has averaged 36% descents in bear markets going back to 1929, according Ned Davis Research, as cited by The Wall Street Journal.

So we may have a ways to go. And bear markets can last quite some time. Stocks eased in the period of 2000-2009 and also didn’t rise in the period 1966 to 1982.