This year has been marked by incredible rallies in stocks that some had previously written off. Tesla Motors Inc (NASDAQ:TSLA), Netflix, Inc. (NASDAQ:NFLX) and Facebook Inc (NASDAQ:FB) have become Wall Street darlings after languishing for quite some time. Today we have a couple of new names to add to the list: Yahoo! Inc. (NASDAQ:YHOO) and Baidu Inc (NASDAQ:BIDU), both of which join Facebook Inc (NASDAQ:FB) this week in hitting new multi-year highs.
But the fact remains that this has been a tough week for U.S. stocks. In fact, they could still end this week in the red.
In August, Mohnish Pabrai took part in Brown University's Value Investing Speaker Series, answering a series of questions from students. Q3 2021 hedge fund letters, conferences and more One of the topics he covered was the issue of finding cheap equities, a process the value investor has plenty of experience with. Cheap Stocks In the Read More
Gundlach warns about glue in the markets
In his investor call for DoubleLine Capital on Thursday, Jeffrey Gundlach said (via MarketWatch) it looks like we’ve reached the end of a surge in stocks paying dividends. Now high flyers like Tesla Motors Inc (NASDAQ:TSLA), Netflix, Inc. (NASDAQ:NFLX) and Facebook Inc (NASDAQ:FB) are acting like glue for the markets by helping hold them together. All three of them are trading near their 52-week highs.
But these high fliers are no longer enough to hold the markets together, and it looks like U.S. stocks will post a loss this week.
Fears about tapering, government shutdown dominate the markets
U.S. stocks remained in check amidst worries about when the Federal Reserve will begin tapering its bond buying program. Worries about a partial government shutdown also loom as lawmakers face a Monday night deadline to approve Obamacare and the rest of the government spending plan.
The Dow Jones Industrial Average lost .59 percent on Friday, falling to 15,238.08 in late morning trading on Friday. The Dow was on track to post a sixth loss in seven trading sessions on Friday after snapping a five-day losing streak on Thursday, thanks to a report that unemployment filings declined last week.
The S&P 500 lost .48 percent, falling to 1,690.56. The index has fallen 1.9 percent since hitting a new all-time high last Wednesday, but it has still increased about 19 percent this year.
The NASDAQ Composite Index was also down in late Friday trading, losing .11 percent to decline to 3,783.47.
Are this week’s declines a sign of a bigger crash coming?
Of course that’s the billion dollar question. This week Business Insider founder, editor and CEO Henry Blodget said he believes “there’s a decent chance” the stock market will indeed crash “in the next year or two.” He believes it could drop by 30 percent or perhaps even more. But even if the markets don’t crash, he believes stocks will deliver “poor” returns of only approximately 3 percent a year, compared to the general expectation of 10 percent returns each year.
So why is Blodget so bearish on the stock market? He notes that stock prices right now are expensive in comparison to the companies’ earnings. However, he also notes that earnings are “much higher than normal.” He said every other time we’ve seen these two market conditions happening in a similar way, stock returns have become depressed, so he thinks the cycle will repeat itself again. He’s got some really excellent charts to back up his theory, and they’re definitely worth checking out if you’re looking for a more in-depth explanation of his view.