A top economist says the stock-market mania reminds him of the dot-com and housing bubbles - and warns consumers are feeling the squeeze
- David Rosenberg warned the buzz around stocks today is similar to the mania before past crashes.
- He highlighted the Great Crash of 1929, the dot-com bubble bursting, and the financial crisis.
The feverish excitement around stocks today is similar to the mania that preceded the Great Crash of 1929, the dot-com bubble bursting in the early 2000s, and the housing market's collapse in 2008, David Rosenberg has warned.
The veteran economist and Rosenberg Research president also rang the alarm on the US economy in a research note on Wednesday. He underscored that American consumers are running short of cash, and finding it harder to borrow money.
Rosenberg highlighted three famous quotes uttered before past crashes, to underscore the similarities between investors' unwavering confidence then and now:
"Almost like the Irving Fisher refrain in 1929: 'Stock prices have reached what looks like a permanently high plateau.' Maybe a bit like Abby Joseph Cohen ahead of the tech wreck: 'We expect 2001 to be yet another year of profit expansion, albeit at a slower pace.' Or how about Chuck Prince's doozy in July 2007 that 'as long as the music is playing, you've got to get up and dance.'"
The former chief North American economist at Merrill Lynch said the fear of missing out (FOMO) driving stocks higher today reminded him of those periods. The S&P 500, Nasdaq Composite, and Dow Jones Industrial Average have all surged this year, in part because investors are bullish on Big Tech and artificial intelligence.
"The balloon does have a lot of hot air in it," Rosenberg noted, suggesting it was hard to say when speculation and emotion would cease trumping fundamentals and rational thought.
Rosenberg struck a bearish tone on the US economic outlook too. Consumers had been living off their pandemic savings and relying heavily on credit cards to weather historic inflation and rising interest rates, but now they're "at the end of the rope," he said.
The economics guru pointed to a 2.6% drop in real, annualized retail sales in the second quarter. He also noted the New York Fed Credit Access Survey showed a decline in the percentage of loan applications approved in June, and higher rejection rates for credit cards, mortgages, and auto loans.
Moreover, the surveyed households reported a historically high risk of needing to come up with $2,000 in the next month, plus a lower ability to find that extra money, Rosenberg said.
It's undeniably bad news for the US economy if consumers are exhausting their savings, and struggling to secure loans to buy homes, cars, and other products and services. Tighter credit and a decline in consumer spending could slow overall growth, erode corporate profits, pull down asset prices, and plunge the US economy into recession.
Rosenberg has issued similarly dire warnings in recent months. He told Insider in February that a recession appeared inevitable, and predicted the S&P 500 would plummet to 3,000 points — a 34% decline from its current level of about 4,575 points.
However, several economists and executives have grown less worried about a recession. Inflation has dropped from a 40-year high of 9.1% to 3% over the last year, paving the way for the Federal Reserve to cease hiking interest rates and start cutting them in time.
The US central bank has raised rates from almost zero to over 5% since last spring in an effort to curb price growth. That has raised borrowing costs for consumers and businesses, and wreaked havoc on debt-fueled industries such as commercial real estate.
If the Fed reverses course and begins to loosen its monetary policy, that could boost the prices of stocks and other risky assets, and allow the economy to escape a recession.