The Dow’s latest winning streak is bad news for stocks

David Rosenberg.CNBC

The Dow’s recent winning streak is a worrying sign, David Rosenberg says.

The index was up 28% at this point in 1987, but virtually erased its gains by the year’s end.

Rosenberg says a recession may be underway, and plunging inflation can be bad news for stocks.

The stock market’s breathless climb should be a red flag to investors, and a recession may already be underway, David Rosenberg warned in a note to clients this week.

For the first time since January 1987, the Dow Jones Industrial Average closed in the green for 13 straight sessions before snapping its winning streak on Thursday.

Stocks were up 28% at this point in 1987, Rosenberg noted. But they erased those gains over the next five months, in large part because the Dow tanked 22% on October 19 that year — a date now known as Black Monday.

“The giddiness was omnipresent as is the case today and the bears were laughed at … but look at how the year ended … FLAT!” the Rosenberg Research president said.

Rosenberg cautioned investors who expect stocks to soar because inflation has now slowed. The pace of price increases has plunged from 9.1% to 3% over the last 12 months, fueling hopes that the Federal Reserve will halt its interest-rate hikes and soon reverse them, enabling the US economy to avoid a recession.

The former chief North American economist at Merrill Lynch emphasized that inflation typically cools because demand has dropped, and that usually translates into slimmer corporate profits and pressure on stocks.

Indeed, Rosenberg pointed out that inflation fell sharply during the dot-com era, the financial crisis, and the early-1980s downturn — and the S&P 500 tanked 26%, 30%, and 8% during each of those periods.

Moreover, he complained that some stocks are exorbitantly priced as a result of investors’ fear of missing out.

“I say that either long-only investors don’t own a calculator or can’t do the math on relative valuations,” he said. “This is what FOMO-based rallies look like — inversely correlated to rational thought.”

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The veteran economist also advised against…


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