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If you thought that January was as bad as it could get for your stock portfolio, I suggest you prepare yourself. Because it may just be the beginning of a long and painful market correction we’re about to see. I’m not here to tell you how to invest your money or to tell you where to invest it, but I can point out historical data that serve as good indicators of where the market could be headed.
Frankly, it doesn’t look good.
It all starts with inflation. Yes, we’ve just gotten some encouraging job numbers for February, but what really has investors spooked are the sky-high prices of consumer goods–the worst we’ve seen since 1982. These challenges are so widespread that Federal Reserve chair Jerome Powell walked back his “inflation is transitory” comments from late last year. Inflation is here, and it’s not going away anytime soon, even with the Fed likely to raise interest rates, and the rate hikes won’t be small.
They can’t be small because of the wide disparity at the moment between the federal funds rate and the Consumer Price Index. We can’t have any disinflation, which is what economists call the slowing of inflation, until the funds rate is lower than the CPI. And it’s nowhere close. But that’s not the only problem we’re facing.
Warren Buffet, the famous investor, has an important indicator he’s used.
It’s the ratio of the value of the stock market to the value of the economy. Right now the stock market by his estimate is running about $49 trillion in value. The economy, GDP, is only $24 trillion. So stocks are 205% of GDP, but Buffet estimates that fair value is just 120%. Basically stocks are gonna have to fall 40 points to get to what Buffet considers to be fair value. 40%.
Well, that means that this last January may have been rough, but it’s just a taste of what’s to come.
