Henry Blodget: This could be exactly what the start of a major correction looks like

Business Insider CEO Henry Blodget has been calling for a market correction for a long time. In fact, it has been a couple of years now. Blodget is not claiming that the pullback earlier this month is the start of a major correction but he says investors need to be prepared for the worst. Following is a transcript of the video.

Sara Silverstein: I’m here with Business Insider CEO Henry Blodget who’s been warning of a bigger correction for quite some time. Has enough happened? Is it time to buy the dip or is there a lot more to come?

Henry Blodget:Well, let’s qualify the quite some time. It has been years. This is based on valuation. I have no idea what stocks are going to do over the next six months, year, who knows. I would say that if this is the start of a major correction, this is exactly what it’s going to look like. You see a big flip, a big drop, big recovery, lots people say, “Oh, thank goodness that was just a one or two day thing, off to the races again – buying opportunity.” It’s exactly what it looks like then you get another leg down, then you get a little bit of bad economic data that people weren’t expecting, then 18 months later, we’re down 30-50%, the economy is a mess, people are furious that people didn’t see it coming, how could they have missed it? So this is exactly what it does look like. But to go back to the major call, the stock market is twice the level it has been historically on many different measures, not just the cyclically adjusted PE – which everybody wants to beat up on now, because it’s been so egregious for so long – but many other measures: GDP, regression analysis of the S&P 500, stock performance. So look at all of those. We’re 2X where we have been historically. Sure, you can say, “Maybe it’s different this time,” but it better be different this time or we are in for either a period of long flat, no returns or a major correction.

Silverstein:And do valuations generally come down slowly like they rise or do they come down very quickly until they’re normalized?

Blodget:Sometimes – as in 1966 to 1982 – they basically move sideways for what amounts to forever. Sixteen years in that case with a pretty precipitous drop in the end, some bad years in the middle, but basically flat. Sometimes – 1929, 2000, 2007 through 2009 – they dropped precipitously. And then everybody gets completely freaked out. You get all these people who say, “I’m in it for the long term. I can handle volatility.” Everybody can handle volatility until your down 30% and it looks like we’re going down another 50%. Then volatility starts to feel a little scary. So many people got blown out during the financial crisis, which is tragic for your retirement, given what has happened since then. I think that the way to invest is to be fully prepared for a pullback of 50%. If you’re unhappy with that, you’re probably overweight in stocks.

Silverstein:And it seems like we’re in that phase now, because I’m seeing a lot of notes and people say, “2018. Stocks will still go higher, but volatility will return.”

Blodget:Yes, and again, it’s very difficult as a strategist to – who is responsible for predicting the next 12 months – to really do anything other than say, “The trend will continue as it has been.” Especially when you can’t see any big changes in economic data. There are some scare stories out there. But the problem is it’s like driving a hundred miles an hour at night. Your headlights show only so much, but you’re already past the point where you can stop by the time you get in trouble if you’re going too fast.

Silverstein:Is the thing that everybody should be watching – everybody is talking about inflation, which is starting to return, and then interest rates. Is that the only thing that matters right now?

Blodget:Well one of the big justifications for the stocks being where they are and having done what they have done is interest rates, which have been basically zero for a long time and that does inflate the value of other assets. It has undoubtedly contributed to the stock market as has been this environment with incredibly low interest rates and low inflation. And investors did have a couple of days of panic when it looked like inflation is starting to tick up. People have been waiting for that for a long time; it hasn’t happened. If inflation really does start to tick up and the Fed is forced to raise rates – historically has not been good for the stock market. So folks are wise of it. Today we look at it, we get a bad economic number, stocks go up. Why? Because people say, “Oh, the Fed won’t have to raise rates.” So they’re so excited about that. So again, near term it’s anyone’s guess, whether this is the start of something that gets really ugly or whether it’s just a pullback from an entirely euphoric blow off where we’ve gone straight up for the last five months.

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