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Economist: Stock Market Clowns Have Blown a ‘Mega-Bubble’ in the Dow

Last Updated September 23, 2020 2:27 PM
Francois Aure
Last Updated September 23, 2020 2:27 PM
  • The stock market is at record highs, even though the U.S. economy isn’t.
  • Concentrated bets on a handful of titanic companies have the major U.S. indices soaring.
  • Economist David Rosenberg warns this is a “mega-bubble” – and the pop is going to be “spectacular.”

As the stock market continues to wind its way higher, Wall Street’s permabear herd is growing thinner and thinner. There aren’t many left, but the few who remain can barely believe their eyes as the Dow marches toward a new all-time high.

David Rosenberg: Brace for a ‘Spectacular’ Stock Market Crash

There’s no question it has been a tough year to be one of the bears. They finally got the stock market crash they were looking for , only to have it whisked away before their eyes.

Steadily rising equity prices rubbed salt in the wound over the ensuing months, with both the S&P 500 and Nasdaq eclipsing the already frothy heights they achieved in early 2020.

Dow Jones, Stock Market, S&P 500
The Dow Jones has risen from the ashes of a major crash in 2020. | Source: Yahoo Finance 

The poster child for the bull market has to be the world’s most valuable stock: Apple. There’s no comparison to AAPL’s run-up to a $2 trillion market cap, though Tesla’s incredible momentum ranks as an extremely close second.

David Rosenberg, chief strategist at Rosenberg Research and formerly the top North American economist at Merrill Lynch, doesn’t buy that stocks can justify record highs while the economy is in the tank.

He continues to ridicule the moves seen on Wall Street , and he predicted this week that an incredible crash is on the horizon:

Watching the market these days is like watching a clown blowing up a balloon (or Chuck Prince dancing in the ballroom) knowing the inevitable. Remember what Herb Stein had to say about things lasting forever. When this mega-bubble pops, it will be spectacular.

Rosenberg has long been bearish on equities, but he claims the present behavior in financial markets is bordering on the comical.

Stock Market Crash, David Rosenberg
Rosenberg has been cautious about the state of the stock market for some time. | Source: David Rosenberg via Twitter 

Fueling the caution of bears like Rosenberg is the inexplicable success of novice investors like Dave Portnoy, who has embodied the FOMO with his “stocks always go up” mantra. Watch a recent clip of his “Davey Day Trader Global” web show below:

Ironically, although it’s the bulls that sparked the mega-cap rally, it’s the former bears who are sustaining it.

Sebastian Galy at Nordea Asset Management explained why in a comment shared with CCN.com:

As a consequence, bearish bets on top growth stocks have reached an all-time low. Momentum trades are amplified by the market making of option traders and their concentration in a few growth stocks.

Dow Jones Strength Belies a Fragile U.S. Economy

Much like the upcoming U.S. presidential election, this bull run has polarized economists.

Bears like Rosenberg struggle to reckon the economic plight seen in working-class households  with buoyant asset prices.

On the other end of the spectrum, bullish analysts simply shrug their shoulders and say what happens on Main Street is irrelevant to what happens on Wall Street . In their view, equities are appropriately priced based on near-zero interest rates .

If a stock market crash like the one David Rosenberg envisions is coming, it’s clear that Dow bulls will be caught on the wrong side of an extremely crowded long trade.

The question facing Rosenberg and his shrinking band of battered bears is this: If a once-in-a-century pandemic couldn’t ignite a sustained sell-off, what on Earth is left to light the fuse?