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30-Year-Old Vet Shares 5 Indicators Showing Weakness




  • The S&P 500 ended 2021 up 27%.
  • But Jon Wolfenbarger warns the party could be over as the macroeconomic outlook changes.
  • He shared 5 indicators that tell him that stocks are in a dangerous situation.

After a year in which the S&P500 returned 27%, 2022 has given investors a hard pill to swallow so far.

Amid all the uncertainty surrounding COVID-19, the effects of Federal Reserve monetary policy and rising inflation, the index is down more than 3%, while the Nasdaq is down 6.5%.

But things could get even worse.

According to Jon Wolfenbarger, the founder of and former Allianz Global Investors securities analyst, stocks are showing signs of weakness ahead. In one commentary piece last week he listed a plethora of bearish indicators.

On the one hand, the VIX, which reflects the expectations of


in the market, looks set to spike as its Percentage Price Oscillator turns positive. This indicates an increased appetite for risk among investors, Wolfenbarger said.


In line with investor sentiment, Wolfenbarger pointed out that positioning is still at more extreme levels than during the bubble, according to the Rydex Asset Ratio. It compares assets invested in money market and bearish funds to those invested in sector and bullish funds.

investor positioning

Then there is the slowdown in the rate of growth of the money supply.

“The Fed and the banks increased the money supply by more than 40% following the initial Covid panic. Like this graph from our Austrian money supply shows money supply growth has slowed significantly to just 7%,” Wolfenbarger wrote. “This suggests the economy will slow going forward, especially with Fed tightening this year.”

money supply growth

The yield curve, measured here as the spread between the yield on 10-year and 3-month Treasury bills, is also at low levels relative to previous economic recoveries and appears to be moving sideways. A steepening yield curve tends to show more robust economic growth.

yield curve

All this adds up to a potentially tricky environment: investors over-positioned in equities at a time when some signals of economic growth are showing up in worrying ways.

What makes the situation all the more tricky is the current value of the average stock. Schiller’s average price-to-earnings ratio for the S&P 500 is at its highest level since 2000, thanks to high levels of


and bullish expectations for future growth. Wolfenbarger uses total market capitalization relative to the total value produced by companies as a valuation measure.

High valuations put the market in a more vulnerable position, particularly when strong growth is at stake and liquidity is drying up.

stock market valuation

Although Wolfenbarger did not call for a specific pullback in terms of size and timing, he said in November that stocks would be 50% less in about a decade.

Wolfenbarger’s views in context

Wolfenbarger, who began his career in 1992 as an investment banking analyst at JPMorgan, is not alone in worrying about high valuations associated with monetary tightening and questionable economic growth expectations.

Morgan Stanley’s Mike Wilson, Bank of America’s Savita Subramanian, and Stifel’s Barry Bannister, all top equity strategists at their respective banks, have relatively bearish outlooks, either short or long term. Subramanian sees stocks moving sideways this year, but sees negative returns for the S&P 500 over the next decade. Banish too. Wilson sees stocks falling another 5% this year.

Others, like David Kostin of Goldman Sachs and Brian Belski of BMO, have a more optimistic outlook, as they expect further growth.

It is still unclear how the markets will react to the policy tightening. The gradual reduction and rate hikes could already be factored in to some extent. But as inflation continues to soar to 40-year highs, there also remains uncertainty around the policy itself. JPMorgan CEO Jamie Dimon, for example, said on Friday that the The Fed could raise rates up to 7 times in 2022, against the three planned.

There are also questions about what the policy tightening means for economic growth. A weak market could weigh on already poor consumer sentiment and hamper record levels of consumer spending. Some argue, however, that the Fed’s rate hikes signal that the the central bank is confident in the economic recovery.

A lack of political will for fiscal spending is also expected to hurt economic growth. Goldman Sachs lowered its 2022 GDP forecast after President Joe Biden’s Build Back Better program failed to get the approval it needed in the Senate.

COVID-19 could also continue to hamper future economic growth.

In sum, it’s hard to say where the stocks will go from here. But with high valuations and a relatively unfavorable macroeconomic situation compared to last year, investors should perhaps be more risk-aware going forward.




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