By Brett Arends
Well, the 401(k) “Death Watch,” is underway.
“A huge collapse is coming,” warns longtime market prognosticator Harry Dent. He adds, “This thing will be hell,” it could be “the biggest crash ever,” and the start of “the next big economic downturn.”
When? By the end of June , if not sooner, it seems.
That’s less than 10 weeks away. Oh, well.
Dent’s forecast seems to have struck some kind of chord. For about a week or longer, the article was the most popular article at ThinkAdvisor.com. But although he may be unique in setting a deadline, he’s not the only guru predicting disaster.
Just this week I got a note from Jonathan Ruffer, an eminent money manager in London, with this dire warning: “I take it pretty much for granted that the 40 year bull market is ending, and that it will be replaced by hard investment times.” And Jeremy Grantham (also born in England, but long based in the U.S.) recently concluded that stocks, bonds and real estate are all in a bubble and may well collapse together in the next year or two. Longstanding gloomster John Hussman estimates the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.37% could end up losing us all money over the next 20 years even before you deduct inflation, and suspects a quick 25-30% market slump may be ahead.
I have a guilty secret. I’m a sucker for these warnings (OK, maybe not for Dent’s). They often make for compelling reading. The most bearish stock market forecasters are generally more intelligent, more freethinking, and more interesting than the average Wall Street salesman. They usually write much better, too. Hussman’s math and logic are almost unarguable. Why, asked John Wesley, does the devil have the best tunes? (I am not comparing these people to a religious devil, of course, only to the Wall Street equivalent: Sinners who may interfere with the business.)
And their arguments make plenty of sense. Maybe not those predicting a market collapse in time for Wimbledon, but those warning us of grim years ahead. The U.S. stock market is almost 90% above the level where the “Warren Buffett Rule” is supposed to trigger red flashing lights and deafening warning sounds. The so-called “Shiller” or cyclically adjusted price to earnings ratio ], the Tobin’s Q — all sorts of measures are telling us some version of Alien’s “Danger! The emergency destruct system is now activated! The ship will detonate in T minutes 10 minutes.” Run, don’t walk, to the escape pod. Don’t forget the cat.
And most of the most bullish forecasts we hear from Wall Street involve the simple fallacy of double-counting: The more stocks rise the better their “historic returns,” which a salesman then cheerfully extrapolates into the future.
Ergo, the more expensive stocks are, the more attractive they are.
The bears have had plenty of logic and math on their side. But most of them have been predicting various reruns of the Great Depression for most of the past 20 years. Not just in 2000 and 2007, which were good times to get out of stocks, but also the rest of the time, which weren’t.
Over the past 20 years, a simple U.S. stock-market index fund such as the SPDR S&P 500 ETF /zigman2/quotes/209901640/composite SPY +0.39% or Vanguard Total Stock Market Index fund /zigman2/quotes/202876707/realtime VTSMX +0.39% has quintupled your money.
These forecasts are always guaranteed to generate a lot of attention. More important, fears of a market crash have kept vast numbers of ordinary people out of stocks completely. In my day to day conversations I’m struck by how many otherwise sensible people think, not simply that the stock market is risky, but that you can, and possibly will, “lose everything.”
Why is this? And why do I (like many others) find myself peeking at the latest iceberg warning? It’s hard wired into us, psychologist Sarah Newcomb tells me. Warnings trigger our body’s stress, flight-or-fight responses, she says. “The story that there may be a market boom may move us slightly, but the story that they may be a market crash moves us more,” she says.
Newcomb, who has a Ph.D. in behavioral economics, is the director of behavioral science at financial research company Morningstar.
I guess it goes back to all those eons when our ancestors were roaming the savannas of Africa. At the first sign any sign of danger they learned to run first and ask questions later.
The early humans who treated every rustle in the grass as a lion lived to pass on their genes.