Paul Dietrich, the chief investment strategist at B. Riley Wealth Management, recently posited a potential 44% crash in the stock market, drawing from his successful past strategy of reallocating investments from stocks to safer assets like bonds, cash, and gold during precarious times.
In his April market commentary, Dietrich reflected on his decisions during the 2000 and 2007 market downturns which helped his clients avoid significant losses during the dot-com and housing market collapses, despite missing out on some preceding stock gains.
During the 2000-2002 recession, Dietrich’s strategy led his clients to a net gain of 7% before fees, despite the S&P 500 and Nasdaq plunging by 49% and 78% respectively. In the 2008-2009 financial crisis, his clients’ portfolios decreased by about 6% gross of fees, yet significantly outperformed the S&P 500 which fell by 57% during the same period.
Dietrich describes the current market environment as a “Mardi Gras-like stock market bubble,” detached from fundamental valuations. He argues that the S&P 500 is "wildly overvalued" and would need to drop by 8% just to revert to its 200-day moving average. Historically, he notes, the index has retreated by an average of 36% during recessions. Based on these observations, he suggests the S&P 500 could plummet to around 2,800 points, mirroring lows last seen during the peak of the pandemic in 2020.
Dietrich also expressed concerns about a looming mild recession, citing inflated stock valuations, alarming indicators such as the Buffett Indicator reaching historic highs, sustained high interest rates, and record gold prices. These factors, coupled with massive government spending, consumer debt levels, and emerging weaknesses in the labor market, he believes, point to an imminent economic downturn.
Despite the consistent outperformance of his past strategies, Dietrich's cautionary stance invites skepticism, as the stock market and economy have continually resisted similar pessimistic predictions. Esteemed investors like Warren Buffett have historically advised against market timing, advocating instead for consistent investment strategies such as dollar-cost averaging into index funds.
Nevertheless, Dietrich's concerns are echoed by notable financial leaders like JPMorgan CEO Jamie Dimon, Goldman Sachs CEO David Solomon, and Citigroup CEO Jane Fraser, who have all highlighted unaccounted risks in current market valuations, including inflation, potential recession, and geopolitical tensions.
