The stock market could experience a significant downturn of up to 30% if a recession occurs, according to a market veteran.
What Happened: Paul Dietrich, the chief investment strategist at B. Riley Wealth Management, has cautioned that the current stock market is being driven by investor emotion and the fear of missing out, reported Business Insider.
Despite the S&P 500 reaching an all-time high of 5,000, Dietrich believes that investing in this market is a mistake, as it is primarily fueled by investor hype. He pointed out concerning signs in the economy, such as rising unemployment and increasing consumer debt.
“So many investors get caught up in the excitement, momentum, and enthusiasm of a stock market that is running like the Kentucky Derby,” Dietrich said in a note last week. “It is that irrational Fear Of Missing Out, or ‘FOMO,’ that fuels this behavior.”
Dietrich also highlighted that inflation, which has recently decreased, has historically not been a significant issue during recessions. “Even in a mild recession, investors holding the S&P 500 index should expect to lose over a third of their retirement investments in stocks,” he warned.
Other market bears have also warned of a potential recession in 2024, with the odds currently at 85%, the highest since the 2008 financial crisis. Despite these warnings, 42% of investors remain bullish about the market, and there are expectations of ambitious rate cuts from the Fed by the end of the year.
Why It Matters: Dietrich’s warning adds to a series of cautionary signals from market experts. Earlier in January, Jon Wolfenbarger, a seasoned market strategist, also predicted a significant stock market crash and a year-long recession. He based his forecast on various economic indicators, including The Conference Board's Leading Economic Index and the longest stretch of an inverted yield curve in over 50 years.
Similarly, Amundi, a European asset management firm, forecasted a slowdown in the U.S. economy in 2024, which could lead to a weaker performance from leading mega-cap stocks. The firm’s head of equity research, Craig Sterling, highlighted the significant difference between the current stock market and that of a year ago.
Despite these warnings, a survey conducted by the National Association of Business Economics revealed that only 25% of business economists and analysts foresee a recession in the United States in 2024. The potential downturn is likely to be triggered by external factors, such as a conflict involving China, rather than domestic economic issues like increased interest rates.
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