In 2024, I blogged about a potential stock market correction several times because overall valuations were so high relative to the size of our economy (Buffett Indicator), there was so much euphoria, and price-to-earnings ratios were so high, among other things.
But we only saw a temporary correction over the summer – and the markets have since roared back and then some.
I was making those crash predictions based on the comments of numerous macro analysts I was following, who all had concerns about over-valuations.
But there was one analyst who remained bullish last year – and that was my favorite analyst of all: Brent Johnson.
He’s my favorite because he is so rational, non-tribal, and accurate (so shame on me for not giving him more credence).
In any case, Mr. Johnson is now saying that a stock market correction is very likely – in this recent video: Is The Stock Market Correction Finally Here?
Johnson is a Wall Street vet with 26 years of experience and his own fund that he actively manages.
Johnson is a student of history who has analyzed every stock market bubble in the past, and he references similarities between today and past bubbles – including the South Sea bubble, the 1929 crash, the Dotcom crash, the 2008 crash, and even the 2020 SPAC/Meme Stock bubbles.
All bubbles have three things in common:
- Excessive valuations (relative to the economy and earnings). Check.
- Abundant credit, as indicated by banking lending, M2 money supply growth, liquidity in the market, options trading, and leverage. Check again.
- A compelling narrative, e.g. AI is going to change the world. Check again.
Note: AI will change the world, but just in ways that nobody fully understands, similar to what we saw in the early stages of the internet.
But here’s the other huge factor that Johnson says will bring down the markets: passive asset management (index funds).
I’ve blogged about this several times, too, referencing Michael Green. Mr. Green points out that algorithm/machine trading (that huge funds like Vanguard use) drives markets up irrationally because they have to buy en masse whenever certain stocks rise – only pushing them up further. This massive pressure can be reversed on a huge scale when stocks start to drop – and there’s no stopping it because there are no humans to stop the slide. Here is a great podcast in which Green explains his theory: Stock Market Is A Ponzi Scheme.
Long story short: when one of the most ardent, long-time, and accurate bulls becomes a bear, I listen.
NOTE: Johnson is adamant that we will not see a 1929-level crash, an everything bubble crash (like so many are predicting), or a depression. He says it will just be a correction.
More importantly, he remains a long-term bull. He’s very bullish on American stocks, given the dollar’s reserve status, the bigger problems overseas countries are facing, and the likelihood of inflation (that will push up stock prices).
What Will a Correction Do to Real Estate and Mortgages?
We will see two things: (1) falling rates; and (2) an adverse “wealth effect” (where people feel wealthier and spend more when asset prices are higher). This is good and bad.
Rates will fall as investors flee from stocks into the safety of bonds. This will be very good for the mortgage industry, making refis that much more viable.
It will also be very good for the lower end of the real estate market, as those buyers are largely driven by rates and NOT by stock market valuations (the “wealth effect”).
Higher-end real estate markets will, however, stall for a while – like we saw in 2000 and 2008. This is because high-end buyers tend to rely heavily on their asset positions when considering a real estate purchase.
The San Francisco Bay Area, in particular, is extremely sensitive to stock market corrections because so many people are in the market there for one reason or another.
