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Why the stock market may crater 15% in the first quarter 2020

Brian Sozzi
·Editor-at-Large

Stock prices don’t go up in a straight line, something investors sitting on massive 2019 gains are likely to be reminded of soon amid the ratcheting up of geopolitical tensions globally.

“It’s possible [we get a 15% correction in the first quarter],” veteran market strategist Jack Ablin of Cresset Capital said on Yahoo Finance’s The First Trade. “We have a lot of geopolitical uncertainties, that could be the catalyst. Essentially we have got everything in place — strong liquidity, strong momentum but valuations are high.”

You best believe those stock valuations are high, if not excessive and undeserving in light of what looks to be at best 2% U.S. GDP growth this year (among other concerns).

For instance, the “Warren Buffett Indicator” — which measures the total market cap of U.S. stocks versus U.S. GDP is at a record high of 153%. Before the Great Recession hit right around 2007 (and before stocks crashed...), this closely watched ratio reached a high of 137%. And before the dot com crash in 1999, the ratio peaked at 146%.

In other words, stocks may have gotten out in front of their skis in what could be a slow growth backdrop in 2019. Hence, stock prices could be poised to take a breather — if not a large breather.

Specialists James Denaro, left, and Mario Picone work on the floor of the New York Stock Exchange, Wednesday, May 29, 2019. Stocks are getting off to a weak start on Wall Street led by drops in technology and health care companies. (AP Photo/Richard Drew)
Specialists James Denaro, left, and Mario Picone work on the floor of the New York Stock Exchange, Wednesday, May 29, 2019. Stocks are getting off to a weak start on Wall Street led by drops in technology and health care companies. (AP Photo/Richard Drew)

Meantime, Jim Paulsen over at The Leuthold Group notes the Schiller CAPE price-to-earnings ratio of 30.5 times is currently near the top end of historical bull markets. “This is a very high P/E ratio, which raises legitimate doubts about how much longer this bull market can persist and how much higher the stock market can rise,” Paulsen says.

Concerns on the 2019 market rally extending deep into the first quarter are growing. The readjustment in stock prices could be around the bend, one just has to show a bit more respect to current valuations.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Watch The First Trade each day here at 9:00 a.m. ET. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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