The U.S. stock market is in free fall.
A little over a handful of days into 2016 and the Dow Jones Industrial Average DJIA, -1.02% has lost 5.2% of its value for the year, the S&P 500 index SPX, -1.08% has dropped about 5%, and the Nasdaq Composite Index COMP, -0.98% has tumbled nearly 6.4%. See: S&P 500, Dow industrials see worst ever start to new year.
But perma-bear Marc Faber says it could be a lot worse. The Swiss investor who publishes the Gloom, Boom & Doom Report told MarketWatch that the stock-market downturn could result in the S&P 500 hitting lows not seen in five years.
Faber’s dour forecast is that the S&P 500, which ended Thursday trading at 1,943, amid a China-fueled global market rout, could plunge to its 2011 low.
According to FactSet data, that would be 1,099.23, set that October. Faber referred to that outcome, a more-than-40% plunge in the broad stock-market benchmark, as his “medium bearish” scenario. His most bearish prognostication envisages the S&P 500 falling back to its 2009 nadir, which FactSet data put at 676.53.
But the real kicker is that Faber isn’t pointing to problems in China as the direct cause for the market’s march into bear-market territory. “The main factor is diminishing global liquidity because of the decline in oil prices,” he told MarketWatch.
The U.S. benchmark for crude oil, West Texas Intermediate traded on the New York Mercantile Exchange CLG6, -1.17% has plunged more than 10% in the first seven days of the year, and its international counterpart, Brent crude LCOG6, -1.45% is off 9.6% so far this year.
Faber believes that oil’s slump—a big boon for U.S. consumers scoring cheaper fuel costs—will pinch export economies that sell to oil-exporting countries now facing ever-shrinking revenues. Saudi Arabia, the key swing producer of the Organization of the Petroleum Exporting Countries, is showing signs of the pressures of oil prices that are near $33 a barrel.
Saudi Arabia has held discussions to kick off an initial public offering for its state-owned firm Saudi Aramco, one of the largest companies on the planet, according to a report from the Economist. That could be a way for the country to free up cash and mitigate some of the recent losses from tumbling oil. Read: Saudi Arabia can afford cheap oil, but it’s going to be a grind.
At the heart of Faber’s thesis is the view that the price of crude oil—considered the lifeblood of the global economy—points to an economy that is contracting.
And that is bad news for the U.S. stock market.
“When oil prices increase, it basically is a consequence of expanding [global] liquidity,” Faber said, so inversely, this unrelenting fall suggests contraction.
Market breadth also is another reason for Faber to fret. He points out that the vast majority of the S&P 500 components are in bear-market territory, a move generally defined as a fall of at least 20% from a recent peak.
However, the main U.S. indexes have been insulated from a more severe tumble due to so-called FANG stocks: Facebook, Amazon, Netflix and Alphabet (formerly Google Inc.).
Those stocks, given their size and weighting in the benchmark stock indexes, masked the severity of the S&P problems last year. Facebook Inc. FB, -0.60% gained 34% in 2015, Amazon Inc. was up 118% AMZN, -0.15% Netflix Inc. NFLX, -2.77% returned 135%, and Google Inc. parent Alphabet GOOG, -1.64% picked up 47%. By comparison, the S&P 500 declined 0.7% in 2015.
Faber emphasized it is hard to forecast how everything will shake out. “It is impossible to make predictions because we don’t know the extent of the madness of central bankers,” he said. The Swiss investment adviser and fund manager has blamed the easing measures of the Federal Reserve and other central banks for complicating matters.
Where does an investor find shelter in this mess? Faber says gold GCG6, -0.33% which advanced to its best level since November Thursday to settle at $1,107.80 an ounce and the gold miners exchange-traded fund GDX, -2.42% which has advanced 8.5% year to date.
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