Marc Faber’s Stock Market Predictions for 2017
Dr. Marc Faber, the original “Dr. Doom,” has a dire prediction for the stock market in 2017. He believes that the stock market, which is seriously overvalued, is vulnerable to a massive sell-off.
According to Faber, stocks are overbought and investor sentiment is too bullish for the Donald Trump stock market rally to continue. Eventually, the markets will go down, and when they do, this will trigger massive selling that will be like an avalanche. (Source: “When selling starts in markets, it’ll trigger an ‘avalanche’, Marc Faber says, CNBC, February 26, 2017.)
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It shouldn’t be a total surprise that Dr. Faber is down on the stock market and is predicting a stock market crash. He does, after all, publish the widely read The Gloom, Boom & Doom Report. But that doesn’t mean he’s not right about this dire prediction.
Faber has a pretty strong track record when it comes to accurately predicting the direction of the stock market. He warned readers to bail on stocks in the lead-up to Black Monday (1987), he predicted the Japanese bubble in 1990, and he predicted the Asia Pacific financial crisis of 1997/1998. As one would expect, he predicted the rise of gold and silver prices since 2001 and the rise of the U.S. dollar in 2008.
Are Marc Faber’s prediction for the economy prophetic or pathetic? Ever the glass-is-half-full pessimist, he nevertheless has eternal bulls lining up to say the same thing as him.
Three of America’s biggest banks believe that the markets are overvalued and are susceptible to a sell-off. Their statements are not quite as dramatic as saying that stocks will experience a seismic avalanche when the selling begins but, when Goldman Sachs Group Inc (NYSE:GS), Citigroup Inc (NYSE:C), and JPMorgan Chase & Co. (NYSE:JPM) get bearish, it’s time for even the most optimistic investors to sit up and take notice. But that isn’t happening; investor optimism remains high along with complacency.
The S&P 500 has increased more than 20% over the last 12 months; approximately half of those gains have come since Donald Trump won the U.S. presidential election last November. In the midst of this euphoria, corporate earnings estimates for 2017 have actually fallen by one percent.
Donald Trump Alone Cannot Make America Great Again
Stocks aren’t at record levels because of strong fundamentals like good-old revenue and earnings growth. U.S. stocks are at record levels because of technicals and a dream; a dream that one man can “Make America Great Again.”
But even Faber, a Trump supporter, does not think any one person can truly make America great again, nor does Faber blame President Trump and his new administration for his bearish outlook. “One man alone, he cannot make ‘America great again.’ That you have to realize,” said Faber. “Trump, unlike Mr. Reagan, is facing huge, huge headwinds — including a debt to GDP that is gigantic, as it is in other countries.”
Let’s look at that. The Democrats have championed the strength of the U.S. economy under President Barack Obama. While historians will be the ultimate sages on Obama’s economic legacy, what we do know is that he gave Trump a national debt of almost $20.0 trillion and deficit of around $600.0 million. In 2016, the U.S. registered mediocre gross domestic product (GDP) growth of just 1.6%. During his entire stay at the White House, Obama never saw GDP breach three-percent growth.
Where does that leave our debt-to-GDP ratio? For starters, the ratio compares a country’s debt to its total economic output, as measured in terms of GDP. It’s an important indicator because it’s a reflection of a country’s economic policies and the overall health of the economy.
According to the most recent data, the U.S. has a debt-to-GDP ratio of 106.0%. For comparison’s sake, Japan has a debt-to-GDP ratio of 232%, Portugal (142%), France (116%), Spain (111%), and the United Kingdom (107%).
Government debt grows as the demand for debt grows to fund the increasing deficit levels. The cost of borrowing tends to rise in step with rising debt. Higher interest rates make it more expensive for corporations to borrow and spend. Rising debt also has a negative impact on the U.S. dollar.
In addition to financial headwinds and rising interest rates, Faber believes that earnings and margins at record levels could help cobble the long-in-the-tooth bull market, which celebrated its eighth anniversary on March 8, 2017, making it the second-longest bull market in history.
In February, the S&P 500 saw the fewest declines in any month since May 1990, and the Dow Jones Industrial Average (DJIA) registered 11 record closes. Since the bull market began, the S&P 500 has soared 254% while the DJIA is up roughly 200%.
Again, those gains are not a result of strong fundamentals. Instead, investors can thank the U.S. Federal Reserve’s artificially low interest rates and the loose monetary policies of foreign banks for fueling the rally.
Well, some of those gains have come from overly enthusiastic investors who are certain that Donald Trump’s economic policies, tax cuts, and infrastructure spending will be good for corporate America. Since early November 2016, the S&P 500 has increased 13.5% while the DJIA has climbed more than 16%.
But even Donald Trump alone cannot propel stocks higher, or even help support the current bull market. There are, Faber contends, too many headwinds.
The avalanche that sends stocks hurling lower will not come from one cataclysmic event, rather, the slide will come in an unassuming way. Stocks will start to go down and, when they do, it will trigger selling, which will then snowball and turn into an avalanche.
How Far Will Stocks Fall
Faber recently said that “investors are on the Titanic” and that stocks are going to “endure a gut-wrenching drop that would rival the greatest crashes in stock market history.” (Source: “Marc Faber: Investors are on the Titanic but there’s still a few days to travel,” CNBC, June 29, 2016.)
When will the markets start to sell off and trigger an avalanche? Of course, no one knows when a correction or stock market crash will happen or what the catalyst will be. After all, no one knows exactly why the markets peaked in March 2000, or why the Japanese market topped in December 1989. They just did. And the selling triggered an avalanche.
The same thing will, according to Faber, happen this time. The big question is, how far will stocks fall in this upcoming avalanche? Let’s look at how overvalued they are first.
According to the cyclically adjusted price-to-earnings (CAPE) ratio, the S&P 500 is overvalued by 81.1%. The ratio is currently at 29.1; the long-term average is 16. The ratio has only been this high for longer twice; in 1929 it was at 30 (we’re almost there) and in 1999 it was at 45. (Source: “Online Data Robert Shiller,” Yale University, last accessed March 8, 2017.)
The market-cap-to-GDP ratio suggests that the markets are overvalued by 30.9%. This ratio is currently at 131.9%. A reading of 100% implies that stocks are valued fairly. The higher that the ratio is above 100%, the more overvalued the stock market is. A reading under 100% implies that stocks are undervalued. This ratio has only been higher once since 1950: 153.6% in 1999.
The market-cap-to-GDP ratio is often referred to as the “Warren Buffett Indicator.” In an interview in Fortune, Buffett said, “it is probably the single best measure of where valuations stand at any given moment.” (Source: “Warren Buffett on the Stock Market,” Fortune, December 10, 2001.)
The Wilshire 5000 is the largest index by market cap in the world and is comprised of all stocks actively traded in the United States. The Wilshire 5000 to GDP ratio is at an all-time high of around 140.5. (Source: “Wilshire 5000 Total Market Full Cap Index/Gross Domestic Product,” Federal Reserve Bank of St. Louis, last accessed March 8, 2017.)
If U.S. equities do, in fact, endure a gut-wrenching drop that rivals the greatest crashes in history, how far will they fall?
• 1929: The stock market crashed on October 29, 1929, sparking the most famous bear market in history. The S&P 500 fell 86% over the next three years and did not surpass its previous peak until 1954.
• 2000/2002: The dotcom bubble burst in March 2000 and took the S&P 500 and the tech-heavy NASDAQ down with it. From the peak to the trough, the NASDAQ lost around 80% of its value and the S&P 500 fell by approximately 50%.
• 2007/2009: The bursting of the housing bubble started in 2007. By 2008, the financial crisis was in full bloom. By March 2009, the S&P 500 had lost 56% of its value.
Put in that context, the S&P 500 could be in for a massive decline in 2017/2018 if Marc Faber’s predictions come true. At current levels, a Great Recession-type avalanche would put the S&P 500 near 1,100, erasing six years of gains. To challenge the Great Depression, the S&P 500 would have to crater to around 290, levels not seen since early 1989.
3 Reasons Why Marc Faber Believes Stocks Could Plunge
Marc Faber believes there are three critical trends that could lead to a serious stock market correction or stock market crash: foreign currencies, the U.S. economy, and the Trump administration.
The stability of the U.S. economy has attracted a lot of foreign capital, which has helped boost the U.S. dollar and stock prices. But the trend could easily reverse.
“I believe the time will come when the weakness of the euro becomes uncomfortable for the Europeans, specifically the Germans, and then there will be a reverse,” said Faber. “And the dollar will go down, and the money that flowed into U.S. assets will flow out of U.S. assets, and so the market is more likely to go down.” (Source: “Marc ‘Dr. Doom’ Faber says the ‘very complacent’ market could go down for these 3 reasons,” CNBC, March 2, 2017.)
Even though the U.S. looks strong, it is only relative to other countries. The U.S. economy remains quite weak, based on key economic indicators like tax receipts, car sales, and personal consumption levels. Toss in non-existent wage growth, rising household debt levels, a lack of well-paying, secure jobs, and underemployment approaching 10%, and the U.S. economy looks even worse.
As for the Trump administration, Faber said this: “I believe also the policies of Mr. Trump will actually not reduce the government.” He continued, “Plus, fiscal spending means essentially an expansion of the government, so that is not pro-growth in my book.”
Investments Marc Faber Is Bullish On
What is the U.S. economic outlook for 2017 and what is in the Marc Faber portfolio of investments? There isn’t a contrarian in the world who doesn’t want to make money on the markets. And, in the current economic environment, Marc Faber is bullish on a number of investment opportunities, including precious metals, bonds, and real estate.
U.S equities going higher does not make him bullish when the markets are out of sync with valuations. Fortunately, when it comes to investing, there is more for investors to consider than just Wall Street.
Not all economies will be facing the same doom and gloom as the United States. A lot of other countries have been benefiting from a strong run. Mexico, Brazil, and Asia are up 10% or more in the first few months of 2017.
Faber also says that China continues to look attractive. “For the next three months, money can flow into China. The economy, surprisingly, has begun to do quite well. We see that in retail in Hong Kong. We see that in the hotel industry, and we see that in the demand for commodities.”
These countries are more attractive for investors right now because of—in part—Donald Trump’s trade policies and possible tariffs. Governments around the world, including those in Asia, Mexico, Europe, and South America will come to the conclusion that the U.S. is no longer a reliable economic ally. As a result, they will look to develop new trade partnerships and push domestic-led growth.
To wit, Faber points to the rise in exports from Taiwan and South Korea to China over the last three months (basically, since Trump was elected) as signs of an increase in Chinese domestic consumption rather than an increase in exports to the United States.
In Asia, Faber expects the stock market to benefit from Trump’s foreign policies, with the Hong Kong and Singapore markets returning as much as 15% in 2017 (including dividends).
As a contrarian investor, Faber is well known for being bullish on precious metals and advising his readers to invest 25% of their portfolios in bullion. As investors wake up and see the huge downside risks to the stock market, the U.S. dollar, and the U.S. economy, more Americans will begin to fortify their portfolios with precious metals. Commodities like gold, silver, platinum, and copper could return solid profits in 2017. (Source: “Marc Faber: Gold Should Comprise 25 Percent of Your Investment Portfolio,” Newsmax, July 26, 2016.)
Another reason to like gold and silver in 2017? Marc Faber’s prediction for the economy is that the U.S. economy will stall in 2017 and deficits will rise. President Trump’s only recourse will be to go “begging the Fed to launch QE4.” This will cause the over-inflated dollar to weaken, stocks to tumble, and “precious metals to go ballistic.”(Source: “Trump will soon be begging the Fed for QE4: Marc Faber,” CNBC, January 11, 2017.)
“When you look at Trump and his administration, and the way the budget is, I think further money printing down the line is inevitable,” said Faber. That’s a policy which could lift precious metal prices even higher.
