The stock market will crash within 120 days. Enjoy the final gasping breath of this bloated swine.

The ride the market has been on, quite simply, has been insane.

According to generally accepted wisdom — by investing in the S&P 500, you can anticipate to double your money, on average, every 6.5 years. I'm not 100% certain as to why that's the accepted figure — as calculating the last 14 6.5 year periods the average rate of return has been 64%.

Below is a chart of the average price/rate of return of GSPC (The S&P) over the last 14 cycles.. I couldn't easily find data prior to this..

While the last two cycles don't necessarily ring any alarm bells — we have just more than doubled, twice, looking at the last two cycles — There is one massive, bloated, shit filled elephant in the room… Price to Earnings Ratio.

Historically, the Price to Earnings ratio for the S&P has sat just under 20 (the easiest data I could find puts it at 19.4x between 1974 and 2017 — I'm not grabbing any arbitrary dates or numbers here). The Median value has it under 18x, and there have even been extended periods of time where it traded at +/- 10x.

Currently — the P/E ratio sits at 28.71 — roughly 150% of what is normal.

In the history of the S&P, the P/E ratio has hit this level only 3 times…

• Immediately preceding, and then during, the Dot Com Bubble (P/E broke 30 +/- April 2001).
• Immediately preceding, and then during, the Global Financial Crisis (P/E broke 30 +/- October 2008).
• The quarter after Covid hit. (P/E broke 30 +/- March 2020).

Historical Price/Earnings chart below (chart only goes through Feb of 2024 — we are actually at 28.71 as of this post):

https://preview.redd.it/qqtw7scqkcad1.png?width=631&format=png&auto=webp&s=0f92f316ff74f7ec4291dd79a1f0190c2f6a6ef0

Historically — what has happened to the markets after crossing this mark? In all three scenarios, by the time we crossed a P/E of 30, the dam had already started to break.

• During the Dot Com bubble, the S&P 500 was already down 19% from its highs, and would fall another 34% before finally starting to recover. By the the time the bleeding stopped, it had lost 47% of its value.
• During the global financial crisis, an almost identical story can be told. The S&P had lost 18% of its value by time P/E broke 30, and when it finally bottomed out in February of 2009, it lost 53% of its total value.
• Covid, obviously, was a much quicker recovery… as we only fell 32%, and had bounced back in less than 6 months time (reason for which outlined later).

Okay — so Maybe we have a price to earnings ratio problem, but you're still not sold. What else do we have going on?

Outside of the fact that I firmly believe that the market is overvalued today, I think there are several other major issues that we are facing in the current environment — and while I could write a diatribe for each, for purposes of succinctness, I'll simply outline them via bullet points below.

• Credit card debt is at an all time high, and outside of a brief period after Covid checks arrived, has been rising since 2013.
• Younger Americans are in the most trouble with credit card debt. As boomers continue to retire, it will be the working class most disproportionately affected.
• Credit card delinquency rates are the highest they've been since 2011.
• Auto loans debt and average auto loan payments are the highest they've been at any point in history. Auto loan delinquency rates are the highest they've been since 2010.
• The stock market is insanely top heavy right now. The Magnificent 7 (Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA)) now account for 45% of the entire value of the Nasdaq. They account for roughly 30% of the entire stock market combined. As of today — they are trading at a combined P/E of 42x. A correction in these 7 companies would be absolutely catastrophic for the entire market as a whole.
• We are starting to see a weakening of the labor market. Furthermore — I do not believe the jobs numbers are entirely as they seem. I think many of the jobs 'added' over the last 18 months have been individuals picking up second jobs to help make ends meet. Any reasonable increase in the unemployment rate have absolutely massive consequences.
• Many banks are holding on to massive unrealized losses. While this has the potential to hit the regional banks the worst, some of the largest banks — including Bank of America, Charles Schwab, and USAA have unbooked security losses that are greater than 50% of their equity capital.
• Regional banks are at risk due to the massive amounts of US treasury notes they hold that were bought during Covid. In short — nobody was borrowing money to buy homes or cars. Banks, flush with cash, took said money and bought US T notes with this money so they could earn some interest on it. This was at a time when interest rates were very low. Now that interest rates are high — demand for these old t notes is essentially non existent, as you buy new t notes that pay a much higher rate of return. If any sort of bank run starts, these banks will be forced to liquidate said t-bills, and they will have to sell them at a loss. If too many people do this simultaneously, the bank will become insolvent — like what we saw happen with Silicon Valley bank, Signature Bank and First Republic Bank. (Side note — the failure of these three banks alone was larger than the combined total of bank failures in 2008 during the global financial crisis).
• The US government still has a spending problem. Our deficit has grown by $500 million since I started writing this an hour ago.
• Global tensions are high — and rising. Massive protests are erupting all over Europe.
• The US is involved in two proxy wars that don't appear as if they will abate any time soon.
• The political division in the US is as dramatic as I've seen it at any point in my existence. Perhaps those older and wiser than me can chime in here — but it seems most are resorting to tribal, identity politics split down party lines.
• Commercial real estate is starting to buckle. Covid brought about work from home, and with many offices retaining those practices, or allowing partial work from home, office space supply far outpaces demand. This problem is exacerbated by high interest rates. Most commercial loans are done on 5 or 7 year balloon. When that balloon is bout to come due, the owner of that property will refinance the loan, restarting the 5 or 7 year period to avoid paying off the balance owed on the property. Many of these property owners that refinanced into low interest rates in 2020, during covid, when rates bottomed out — are now having to get a new loan to keep from paying their balloon. However, with interest rates more than twice what they were several years ago, and vacancy rates skyrocketing, many of these real estate owners will not be able to pay the monthly mortgage on their buildings. Commercial Real Estate foreclosures jumped 117% in March alone.
• Housing has become increasingly less affordable for many Americans. For 2022 — the most recent year I could find data — a family earning the median US household income, renting a median priced US home, was spending 40% of their income on rent.
• Countries are abandoning the US dollar in droves.

I believe some of these issues, on their own, are enough to cause serious economic turmoil. Bundled together, I don't see how we aren't in for a very rude awakening.

This economic downturn may be severe.

In the three times this has happened before — the action, or lake thereof varied dramatically. During scenario one — the dot com bubble — the government largely just let the companies fail. While I was only 11 at the time, my understanding is that there really were no bailouts here because the only people really hurt were the investors in those companies — unlike scenario two. During the GFC, shuttering banks would have resulted in a complete collapse of the US (and really global) financial system. While I won't get into partisan politics, I'm of the belief that the covid bailouts were entirely unnecessary — and more importantly for this post — the reason that the upcoming crash is going to be so insanely problematic.

Bailouts on any level, whether to companies, banks, or directly to citizens, will inevitably increase inflation. I don't think they are on the table for this correction.

People have painted the inflation problem as a result of supply chain issues… And while supply chain issues didn't help, I think the bigger issue, by far, was the sheer amount of money we printed. You cannot make $4 trillion appear out of thin air and expect that every dollar in circulation isn't going to suddenly become worth less money. We just lived through this reality after the Covid printing.

This will largely tie the feds hands. Print more money — we find ourselves in a cycle of ever increasing prices and higher interest rates.

What happens from here?

I don't know. Don't listen to me. I'm an idiot. Stock market will probably just continue to go up. I'm probably wrong about 100% of this.

My Prediction? GSPC/SPY cruise up a tiny bit further, to +/- $5900/$590 — before retreating to $3500/$350 by 12/2025.