Market experts say it is sentiment rather than fundamentals that drives the stock market, and a recession could cause the stock market to fall by more than 30%

The CEO of Smead Capital warned that there is a 50-50 chance that the stock market will fall by 30% in the next two years.Getty Images

  • Paul Dietrich of B. Riley Wealth said putting cash into such stock markets could be a “mistake.”

  • Although inflation has come down from highs, not everything is going well in the “wonderland” economy.

  • Dietrich said in the report that a mild recession could cause the S&P 500 to fall by more than a third.

The driver of the stock market is not fundamentals; Investor sentiment and fear of missing out –A recession could cause the S&P 500 to plummet 30%.

That’s according to Paul Dietrich, chief investment strategist at B. Riley Wealth Management, who has previously warned economic recession and a bear market that could hit the economy this year.

Since 2024, the stock market has continued to soar; The S&P 500 recently surpassed the 5,000-point mark But Dietrich warned that investing in this kind of stock market is always a “mistake” because it is largely driven by investor hype.

“Many investors get caught up in the excitement, momentum and enthusiasm of a stock market like the Kentucky Derby. It’s an irrational ‘fear of missing out,’ or ‘FOMO,'” Dietrich said in a note last week. ‘, “‘This encourages this behavior. ‘

A closer look beneath the surface reveals that not everything is going well in the “wonderland” economy, Dietrich added.

The unemployment rate remains near historic lows but has risen steadily over the past year as more companies hand out pink slips. The number of layoffs and layoffs rose slightly to 1.6 million in December, according to the U.S. Bureau of Labor Statistics.

Consumer spending remains strong on paper, but there are signs that Americans are simply using credit card debt to fund purchases to combat rising inflation. Household debt now stands at a record $17.5 trillion, according to the Federal Reserve.

“Similar to 2000 and 2008, a large portion of consumers hit their credit limits and consumer spending fell sharply. This is not going to end well,” Dietrich warned.

Retail sales posted their biggest drop in nearly a year on Thursday, a sign that consumer resilience may finally be waning.

Dietrich pointed out that although inflation has cooled significantly from its highs, inflation has not actually been a problem in the recession of the past 25 years. This means the economy and stock market are not necessarily sunny.

“While inflation may exacerbate the pain of a recession, stocks could still lose half their value in a recession even without inflation,” he warned. He noted that the S&P 500 fell an average of 36% at the onset of a recession. .

“Even in a mild recession, investors with S&P 500 holdings should expect to lose more than one-third of their stock retirement investments,” he warned.

Other bears on Wall Street have warned that a coming recession could derail the stock market bull run. Chance of recession in 2024 is 85%, which is the highest odds since the 2008 financial crisis, according to one economic model.

However, investors remain quite optimistic about the market. 42% of investors say they are bullish on stocks over the next six monthsThe latest AAII investor sentiment survey shows that the market still expects the Federal Reserve to cut interest rates significantly before the end of the year, with a 68% probability that interest rates will be significantly cut by at least one basis point.point, according to CME FedWatch Tool.

Read the original article business insider

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