The Armageddonists!
While recessions and bear markets are a fact of life, something peculiar happened after the Global Financial Crisis: the rise of the Armageddonists, which refers to the market-watchers, forecasters and money managers whose apocalyptic comments spread like wildfire in print and online financial news. I understand why: by 2010, investors had experienced two consecutive bear markets, each with equity declines of over 40%. It took several years for equity markets to recover each time, unlike the shallower, faster-recovering bear markets of the 1960’s and 1980’s. The dismal performance of consecutive 2001/2008 bear markets hadn’t been seen in decades, and is only comparable to parts of the Great Depression.
That said, what are the consequences for investors that reacted to dire Armageddonist predictions which have flooded the airwaves and internet since 2010? We pulled together comments made by well known Armageddonists since 2010, a few of whom are on record as having anticipated the prior bear market and recession. We measured the impact on an investor deciding to shift a dollar from equities to diversified government, mortgage-backed and corporate bonds after reading the post-2010 comments. To be clear, this isn’t about whether the Armageddonist at some point became more optimistic. This chart is about the opportunity loss for investors that acted upon seeing their comments at the time.
One day, of course, Armageddonists will be rewarded with a recession. However, the next recession and bear market will have to be quite severe to earn back what was sacrificed along the way. Using rough math, a sustained, multi-year bear market with 35%-45% declines from peak levels would be needed to reverse many of the opportunity losses shown in the chart.
Michael Cembalest, JP Morgan Asset Management
[This post is an excerpt from a longer Eye on the Market published in November that reviews the history of bear markets since 1928, determinants of their severity and why we don't believe the next bear market will be as severe as the prior two]
Appendix: Comments incorporated in the chart above
The list below is not an exhaustive ; we could have included Bill Gross (“The Cult of Equity is Dying”, 2012) and Harry Dent (“The US Has Gone Over The Demographic Cliff And Markets Will Crash This Summer”, 2013), but we ran out of room in the chart.
Nouriel Roubini: "There are some parts of the global economy that are now at the risk of a double-dip recession. From here on I see things getting worse." - CBS, May 20, 2010
David Rosenberg: “Another recession is coming, and soon. So says Gluskin Sheff economist David Rosenberg. Rosenberg, a longtime bear on the economy and the stock market, now says he is 99% sure we will have another recession by the end of next year.” - Fortune, June 4, 2011
Jeff Gundlach: “It seems suicidal to buy a broad-based basket of stocks or economically sensitive commodities or emerging markets stocks - all of which are very leveraged to economic growth” - Kiplinger; and "Sell everything, nothing looks good" in July 2016 - Reuters, August 9, 2011
Lakshman Achuthan: “Lakshman Achuthan, co-founder of the Economic Cycle Research Institute, said on Friday that his research firm is sticking with the forecast it made in September: A new recession is inevitable, despite improvement in high-profile economic indicators, such as job creation and unemployment, and a stock market rally. Achuthan said data gathered since his September forecast only confirms his view that economic growth has slowed to such a degree that a downturn is now unavoidable, likely by late summer.” - CNN, February 24, 2012
Marc Faber: “I think we could have a global recession either in Q4 or early 2013. That’s a distinct possibility." When asked what were the odds, Faber replied, "100%" - CNBC, May 25, 2012
Robert Wiedemer: “The data is clear, 50% unemployment, a 90% stock market drop, and 100% annual inflation starting in 2013.” - Newsmax, November 12, 2012
David Stockman: "When the latest bubble pops, there will be nothing to stop the collapse. If this sounds like advice to get out of the markets and hide out in cash, it is.” - Business Insider, March 31, 2013
Albert Edwards: "We repeat our key forecasts of the S&P Composite to bottom around 450 (-70%), accompanied by sub 1% US ten year yields" - CNBC, following on Edwards' "ultimate death cross" in July 2012, April 25, 2013
Peter Schiff: "We’ve got a much bigger collapse coming…I am 100% confident the crisis that we’re going to have will be much worse than the one we had in 2008" - Marketwatch, and "The crisis is imminent. I don't think Obama is going to finish his second term without the bottom dropping out. And stock market investors are oblivious to the problems." - Money Morning, May 30, 2013
Tom DeMark: "DeMark's Dow Jones Index chart covering the period from May 2012 to the present seems to be tracking, almost precisely, the months leading up to the 1929 stock market crash." "The market's going to have one more rally, then once we get above that high, I think it's going to be more treacherous... I think it's all preordained right now." - Bloomberg, October 15, 2013
Bob Janjuah: "We see a significant risk-on top before giving way, over the last three quarters of 2014 through 2015, to what could be a 25%-50% sell-off in global stock markets." - Marketwatch, November 6, 2013
David Levy: “David Levy says the United States is likely to fall into a recession next year, triggered by downturns in other countries, for the first time in modern history. “The recession for the rest of the world … will be worse than the last one,” says Mr. Levy, whose grandfather called the 1929 stock crash . Mr. Levy predicts a US recession will throw its housing recovery in reverse, and push home prices below the low in the last recession. He says panicked investors are likely to dump stocks and flood into US Treasuries, a haven in troubled times, like never before." - The Independent, July 24, 2014
Carl Icahn: “I see real tremendous problems ahead and I don’t think we are handling it right and nobody really wants to talk [it] out... We are headed toward a strong correction and possibly a complete meltdown but not systemic like 2008. It won’t threaten the system, it’s just going to threaten your livelihood and net worth....I do think you are in a very massive bubble and when it bursts it isn’t going to be pretty, it could be a blood bath.” - Forbes, September 29, 2015
George Soros: "Global markets are facing a crisis and investors need to be very cautious, billionaire George Soros told an economic forum in Sri Lanka on Thursday..."China has a major adjustment problem," Soros said. "I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008." - Bloomberg, January 7, 2016
John Hussman: "A broad range of other leading measures, joined by deterioration in market action, point to the same conclusion that recession is now the dominant likelihood." - Hussman Funds, January 18, 2016
Simon Johnson: "Mr. Trump's presidency would likely cause the stock market to crash and plunge the world into recession...anti-trade policies would cause a sharp slowdown, much like the British are experiencing after their vote to exit the European Union." - New York Times, October 31, 2016
Paul Krugman: "It really does look like President Donald J. Trump, and markets are plunging....So we are very probably looking at a global recession, with no end in sight. I suppose we could get lucky somehow. But on economics, as on everything else, a terrible thing has just happened." - New York Times, November 9, 2016
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