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Paul Dietrich, the chief investment strategist at B. Riley Wealth Management, recently painted a concerning picture of the stock market, suggesting a potential decline far exceeding those seen in the early 2000s and 2008 and potentially the worst one Wall Street has seen over the past century.
Dietrich, in his latest commentary, argued that the market is currently experiencing a bubble fueled by speculation and excitement surrounding a small number of technology companies including Nvidia and Microsoft, rather than sound fundamentals like corporate earnings growth.
He pointed to historically high valuations, including the S&P 500’s price-to-earnings ratio and the inflation-adjusted Shiller PE ratio, as evidence of overpricing and added the low dividend yield suggests a focus on short-term gains over long-term investment.
The strategist compared the current investor enthusiasm surrounding artificial intelligence to the dot-com bubble of the late 1990s, raising concerns about a similar bust, while noting a recent surge in the “Buffett Indicator,” a metric favored by Warren Buffett that measures the ratio between a country’s total stock market capitalization and its GDP, which suggests that stocks are approaching dangerous territory as its at 188%, close to the 200% mark where Buffett believes buying stocks is “playing with fire.”
Beyond the market itself, Dietrich expressed concern about the underlying health of the U.S. economy, saying that years of low interest rates and high government spending have merely delayed a downturn, not prevented it.
The strategist predicted that the Federal Reserve will be forced to keep rates high to combat inflation, and the government will need to raise taxes to address its deficit. These factors, combined with a potential slowdown, could trigger a recession.
To him interest rates will remain elevated for years to rein in on inflation, with the government in his scenario being forced to raise taxes to address the growing budget deficit.
While a typical recession might see the S&P 500 decline by around 36%, Dietrich warned of a steeper drop, potentially as much as 48% to around 2,800 points which would bring the index back to levels not seen since the early days of the Covid-19 pandemic.
The strategist suggested other institutional investors are also preparing for a recession, pointing to gold’s 20% rise to new record highs last year as a result of institutions loading up on gold expecting a “major correction or stock market crash due to our wildly overvalued stock market and a slowing underling economy.”
As CryptoGlobe reported the price of gold has also been rising over growing demand from the People’s Bank of China (PBOC), which remains a significant player in the global gold market.
Featured image via Unsplash.