Before 2018, the last time it was the year of the dog was 2006, which just happened to be the final year of GDP growth in the previous economic cycle.
Calling himself the skunk at the picnic, Gluskin Sheff chief investment strategist David Rosenberg kicked off John Mauldin's annual Strategic Investment Conference by predicting a 20 percent correction in U.S. equities. The Toronto-based strategist also questioned the constant chorus of high-profile bond fund managers, often led by Bill Gross, who have been proclaiming that the secular bull market in bonds is over since 2010. Today's bubble in bonds isn't in Treasurys, "it's in corporate credit."
If there is a bubble, it is more likely to be found in stocks, not bonds. However, Rosenberg noted that some prognosticators like former Fed chairman Alan Greenspan believe there is a bubble in both financial asset classes.
Rosenberg cited a report from the San Francisco Fed predicting that current price-to-earnings ratios in U.S. stocks are predicting zero real price gains over the next decade. "I think we're going down 20%," he said, adding Gluskin Sheff has moved 25 percent of its $9 billion in assets to cash in recent months.
That will happen quite soon [like next year] just as millennials are finally finding their financial independence after reaching adulthood during the Great Recession that left many of them in a different state of mind than previous generations. Once again, "boomers screwed millennials," the former Merrill Lynch chief economist for North America told attendees. His 2006 prediction that the U.S. would enter a recession triggered by sub-prime mortgage loans didn't win him any friends at Merrill 12 years ago.
On this recent January 3, Rosenberg acknowledged he was stunned to read a prediction of "one more melt-up" of 60 percent by the widely respected Jeremy Grantham, who is often called a perma-bear. That kind of extreme prediction from a well-grounded, value investing legend was downright right scary to him, particularly as the U.S. stock market was starting to go vertical in January.
By the end of January, several observers in the Wall Street Journal were commenting that market behavior was reminiscent of January 1987. "When people remember 1987, they don't remember January; they remember October," said Rosenberg, who launched his own Wall Street career on October 19 of that year.
In his view, what the S&P experienced in 2017 was nothing less than a "once in a century" phenomenon where there were only eight days of 1 percent up or down movements in the S&P 500. So far in 2018, there have been 16.
One of Rosenberg’s biggest problems with current equity valuations is that the surge in prices during this nine-year bull market has occurred against a backdrop of 2.1 percent GDP growth. Past bull markets typically have taken place during an average cycle of 3.8 percent GDP growth.
Factor that into one of his equations, and Rosenberg estimates the S&P 500 should be closer to 1,500. What he didn't say was that the working-age population during many previous bull markets was rising at a 1.5 or 2.0 percent rate, not the current 0.5 percent rate.