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Mr. Big Short: Stock Plunge May Be Only 50% Over

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Mr. Big Short: Stock Plunge May Be Only 50% Over

The stock market just had its worst start to a year since 1970, with the S&P 500 down 21% in the first half of 2022.

Hyperinflation, recession fears and a Fed rate hike have weighed on stocks.

As for inflation, consumer prices surged 8.6% in the 12 months to May to a 40-year high. On the economic front, GDP contracted at an annualized rate of 1.6% in the first quarter, and some analysts expect a contraction in the second quarter as well.

Speaking of the Fed, it has raised rates by 150 basis points so far this year and has indicated more to come.

earnings, valuation

Meanwhile, Goldman Sachs and other experts said analysts had overestimated earnings growth in the second quarter. Analysts had forecast earnings growth of 4.3% for the quarter ended June 24, according to FactSet.

Even after the recent dip, valuations are arguably still stretched. The price-to-earnings ratio of the S&P 500, which accounts for the past 10 years’ earnings, was recently at 29.41. That’s well above the 16.95 average and 15.87 median dating back to the 19th century.

Some experts believe the pain in the stock market continues. Michael Burry’s character (played by Christian Bale), who starred in the “The Big Short” movie, is one of them. He was one of those who foresaw the 2008 financial crisis.

“Adjusted for inflation, the S&P 500 is down 25-26% in the first half of 2022, the Nasdaq is down 34-35%, and Bitcoin is down 64-65%,” he tweeted.

“That’s multiple compression. Next, revenue compression. So, maybe half the battle.”

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Multiple compressions mean that the price-earnings ratio shrinks as the share price falls.

Burry also recently said that the Fed will eventually have to reverse the pace of its rate hikes due to deflation from bloated inventories.

Roubini sees stocks plummet

Another prominent figure who foresaw the 2008 crisis and foresaw the troubles to come is the renowned economist Nouriel Roubini.

“The next crisis will not be like its predecessors,” he wrote on Project Syndicate.

“In the 1970s, we had stagflation, but we didn’t have a massive debt crisis because debt levels were low. After 2008, we had a debt crisis followed by low inflation or deflation.”

So what are we going to prepare for ourselves next?

“Today, against a backdrop of much higher debt levels, we have a supply shock, which means we’re heading towards a combination of 1970s-style stagflation and a 2008-style debt crisis — a stagflationary debt crisis,” Roubini said.

As for America. Stocks, “likely, they’re going to plummet,” he said. “In a typical ordinary recession, U.S. and global equities tend to drop about 35%,” Roubini noted.

“However, since the next recession will be stagflationary and accompanied by a financial crisis, the stock market crash could be closer to 50%.”

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