Issue of the week: Apocalypse when?

last updated 8 January 2015

You probably thought the 2008–09 stock-market crash was terrifying, but you ain’t seen nothing yet, said Jeff Sommer in The New York Times. So says “veteran market strategist” Robert Prechter, “who makes garden-â€‹variety bears look like pussycats.” Last summer, he was predicting “a market crash of monumental proportions.” Since then, his outlook has, if anything, darkened, precisely because the stock market has rallied more than 30 percent in the intervening months. The bigger the climb, he warns, the harder the fall will be. You don’t have to be a perma-bear like Prechter to feel “deeply concerned” about this stock market, said Dan Dorfman in HuffingtonPost.com. The “rampant bullish fever” among both professional and individual investors should unnerve anyone. Retail investors—who historically have a terrible track record—have “poured $12.3 billion into U.S. stock mutual funds” in the past four weeks. Meanwhile, 52.7 percent of professional investment advisers say they’re bullish, versus only 22 percent who identify themselves as bears. Such “exuberant and frothy investor sentiment” is “generally a prelude to a sizable market decline.”

Sometimes, though, the optimism is warranted, said Steve Reitmeister in Zacks.com. That’s the case today, when “there are sound fundamental reasons for the market to continue its advance.” Corporate earnings are rising strongly. “We have enjoyed a string of several quarters in a row” in which companies have posted better-than-expected earnings. That sort of momentum tends to feed on itself. And the stocks in the Standard & Poor’s 500 index are expected to deliver $96.04 in cumulative earnings this year. That translates into an earnings yield of 7.2 percent, “which is very attractive compared to the meager 3.6 percent yield on the 10-year Treasury” bond. Higher yields will draw in individual investors who were scared away by the crash and send stocks higher.

The scary times may have only just begun, said Jonathan Laing in Barron’s. At least that’s what Jeffrey Gundlach, one of the world’s best bond investors, thinks. Gundlach’s DoubleLine Total Return Bond fund outperformed all 91 of its peers in 2010, with a return of 16.6 percent. A confirmed bond maven, Gundlach “seldom likes stocks,” but lately his antipathy has turned to loathing. He predicts that the S&P 500, currently hovering above 1300, “will hit 500 in the next couple of years”—a drop of more than 60 percent. He’s not too sanguine about the municipal-bond market, either, which he expects to be rocked by billions in municipal-bond defaults “in the next year or so.” Granted, Gundlach is professionally biased against stocks and hopes to make a killing in battered munis. But it seems more and more people fear he may be right.