The second-richest man on the planet foresees another market crash. What’s more, he foresees a market crash as devastating as the market crash of 2008. This, he says, “is a certainty.”
The man is Bill Gates. The agency reporting Gate’s dire prediction is U.K.-based The Sun.
If you are familiar with The Sun’s reporting, you know it leads with the sensational and the bombastic. (The Gates headline was “’THIS IS A CERTAINTY . . . Bill Gates warns of another financial crash as bad as the 2008 Great Recession.”) You also know the content under the headline rarely lives up to the hype.
The Sun holds true to form in its Gates report.
Yes, Gates predicts another major market crisis, one as devastating as the 2008 crisis. The Sun gets it right. Gates gets it wrong, because he offers no time frame. Could it be tomorrow? Could it be a decade from tomorrow? We don’t know. Gates doesn’t say.
A prediction is meaningless without a deadline.
I concur with Gates: Another devastating market crash will occur. I’ll take the next step, though. I’ll give Gates’ prediction meaning. I predict that it won’t occur in 2018.
The stock market has been marked by fits of unusual volatility this year compared to recent history. Investors are cautious.
Volatility can be pro and con. Volatility can favor the upside. More often, it favors the downside. The S&P 500 lost 2% of its market value over the past two weeks. The VIX, a popular measure of market volatility, is up 23%.
Value is the upside to a volatile (down) market. We see more value today. Lower prices lift the value proposition.
The S&P 500 trades at 16.6 times forward 12-month earnings estimates, according to FactSet data.
The S&P 500 began the year trading at 18 times estimates. The S&P trades close to the five-year multiple of 16.2.
Stocks, broadly speaking, are only slightly overvalued from this historical perspective.
S&P 500 earnings are estimated to grow 18.6% year-over-year for the quarter. If the momentum is sustained, S&P 500 companies will produce the largest year-over-year earnings growth since 2010.
The earnings growth, if it materializes as expected, is mostly legitimate. I say “mostly” because EPS growth will receive an additional boost from share buybacks.
Nevertheless, earnings growth and valuations diminish the odds of a bear market – a 20%-or-more drop from a market peak over a minimum of two months. The odds diminish further with investor sentiment.
The latest reading of the AAII Investor Sentiment Survey shows bullish sentiment running at 28.2% among those surveyed. Bearish sentiment runs at 40.8%. Bullish sentiment was running as high as 59% at the start of the year. Pessimism among individual investors is near a high for the year.
Tempered enthusiasm is a good thing. Stocks tend to perform better when the outlook is more bearish than bullish. Stocks frequently need to climb the proverbial wall of worry to move higher.
The United States has seen nine bear markets and 10 recessions since 1950. All but one of the bear markets have been accompanied by a recession.
As for recession odds, they’re low. Recessions are marked by economic contractions. An expanding economy is what most market watchers expect.
The Atlanta Federal Reserve raised its 2018 U.S. gross domestic product (GDP) growth estimates to 2.7% from 2.5% in March. On the world scene, the International Monetary Fund (IMF) forecasts broad-based growth, with Europe and Asia leading the way. The IMF sets its global-growth forecast at 3.9% for 2018.
President Trump’s belligerent stance on trade is a concern. Federal Reserve officials worry that over-escalating trade disputes could weigh on business investment and add risks to the U.S. economic outlook.
I’m less concerned than our friends at the Fed. Businesses are rebelling in mass against Trump’s punitive tariffs on steel, aluminum, and lumber. Trump is still blind to his own economic idiocy as I write. Given the torrent of negative press on tariffs in recent weeks, I suspect that a member or two of his retinue will force him to see the light. They’ll force him sooner than later.
So, Bill Gates is right: A devastating financial crash will occur. I’m confident that I’m right, too: It won’t occur this year.
Stocks remain the asset class of choice.