Ed Yardeni: Why 70-Plus 'Panic Attacks' Haven't Killed the Bull Market

The long, booming stock market has been “the most hated and feared bull market that any of us have experienced, maybe in history.” That could be “one of the reasons [it] keeps going higher,” argues Ed Yardeni, president of Yardeni Research, in an interview with ThinkAdvisor.

“Investors have been ‘spook[ed]‘ by the 2008 financial crisis,” he says. This has resulted in what the strategist, who consults to institutional investors, large RIAs and government policymakers, calls “panic attacks,” when the market plummets.

“I’ve counted 71 panic attacks since the beginning of the bull market in 2009 — and they all turned out to be buying opportunities,” says Yardeni, who, over the years has correctly called several booms and busts. 

The most recent panic attack “was the day after Thanksgiving because of the omicron scare,” he says. But he is bullish on both the economy and the stock market and sees no recession en route.

Before going to Wall Street, he was an economist with the Federal Reserve Bank of New York and the U.S. Treasury.  Then he spent 25 years at firms including Deutsche Bank, EF Hutton (where he was dubbed “Dr. Ed”) and Prudential Equity Group.

Discussing inflation, he says that the American Rescue Plan “certainly seems to have triggered the surge we’ve seen of late.”  “Bidenflation,” as he calls it, “created a demand shock that overwhelmed the supply system.” But “the market doesn’t seem to be concerned” about the potential of hyperinflation, he notes.

Yardeni’s expectations for the Federal Reserve’s next moves are “doubl[ing] the pace of tapering,” then raising interest rates in May. The market anticipates three rate increases, he maintains.

The strategist, an active blogger, believes that the coronavirus will “be with us for a long time, maybe forever.” But he predicts no further lockdowns.

“The worst economic impact of the virus was caused by the policy of lockdowns in March and April of 2020,” he says.

In the interview, he provides his forecast for corporate earnings and the implications of the now-flattened yield curve.

ThinkAdvisor interviewed Yardeni on Dec. 10. He was speaking from his base in Brookville, New York, on Long Island. 

In Dr. Ed’s view, that was a short bear market we experienced in March 2020, sort of. Actually, he says, it was “more of a panic attack.”

Here are excerpts from our conversation:

THINKADVISOR: Do you use any particular methodology on which you base forecasts?

ED YARDENI: Yes. My common sense. [I use] current analysis: You look at the world as you know it today based on the data.

You analyze it and then come up with your theories, instead of the other way around, which is you start out with your theory and look for data to support it.

That’s the way economists, in general, do it.

We’re living in an unusually uncertain environment. Yet the stock market continues to rise. Why?

It’s the old climbing the wall of worry.

What’s your outlook for the market?

It’s a bull market. This has been a great bull market that started in 2009. What we saw in 2020 was a bear market. But it didn’t last long: It was more of a panic attack.

I’ve counted 71 panic attacks since the beginning of the bull market, and they’ve all turned out to be buying opportunities.

You just kind of close your eyes and maybe lie down for a while and then get up and see that the market has recovered.

When was the most recent panic attack?

It occurred the day after Thanksgiving because of the omicron scare. That lasted one day, and the following Monday the market was up.

The following Tuesday the market was down — another panic attack: [Federal Reserve Chair] Jerome Powell was [getting] hawkish because inflation was turning out to be more persistent than transitory, as he had thought.

And now, here we are with the market doing extremely well.

Why have all these panic attacks occurred?

We had such a terrible bear market during the great financial crisis that it’s pretty easy to spook people that things are going to go bad again.

But maybe that’s one of the reasons the market keeps going higher. It’s been the most hated and feared bull market that any of us have experienced, maybe in history. 

It’s not one where everybody is wildly bullish all the time.

When do you think the next bear market might hit?

It will be preceded by some event in the credit market — a financial crisis — that’s fairly limited at first and becomes more widespread. It will look like an economywide credit crunch, which then causes a recession. 

Also, in the past, surging oil prices have been associated with recessions.

But I just don’t see either of these events happening in the next couple of years.

So you don’t see a recession on the way?

No, I don’t. There are certainly elements of the great inflation of the 1970s all over again, when ultimately Paul Volcker [former Federal Reserve Chair] allowed interest rates to go up to whatever it took to bring inflation down.

But I don’t see this [current inflation] turning out to be Volcker 2.0. The market doesn’t seem to be concerned about it.

How come?

The big difference is productivity, which collapsed during the 1970s. Productivity growth has been on a rebound since 2015.

Now it’s around 2% at an annual rate. I think it’s going to 4% by the second half of the decade, which would be very important in offsetting some of the inflationary pressures and allowing wages to rise faster than prices.

What do you think the Fed’s next move will be?

It’s likely to decide at its meeting [this] week to double the pace of tapering. That’s pretty well discounted in the market. 

It would put the Fed on track to be done with tapering and in a position to start raising the interest rate and the federal funds rate, probably at their May meeting.

The market expectation is that there’ll be three rate hikes.

What’s your outlook for corporate earnings?