This Wall Street legend has seen every bear market since the 1950s. He says the one that comes could hit the S&P 500 with a 30% loss

Bob Farrell, a 90-year-old Florida retiree, is hardly a household name on Main Street. But on Wall Street, Farrell is an absolute legend.

To say Farrell saw it all is an understatement. He has witnessed every bull, bubble and bear market since 1957, when he joined Merrill Lynch as a trainee analyst and began a 45-year career at the firm, including a quarter-century as a senior chief stock market analyst.

Farrell’s legendary 10 “Market Rules to Remember,” published in the late 1990s when he was a senior investment advisor at Merrill, should be required reading for both financial professionals and individual investors.

This market survival manifesto, whose dispassionate reality is a welcome antidote to Wall Street’s typically sunny salesmanship, is especially relevant now — as investors are reminded daily that stock prices can’t stand up to either gravity or the fists of the Federal Reserve are immune.

Farrell keeps out of the public eye these days, but he recently shared his forecast for US stocks in an interview with David Rosenberg, a respected veteran market strategist. Rosenberg, a former Merrill chief economist and now head of his own Toronto-based firm Rosenberg research, frequently references Farrell’s sobering rules in research reports decoding market movements for institutional clients. These rules, Rosenberg says, are his “10 Commandments of Investing.”

In the April 27 webcast for Rosenberg Research clients, Farrell said he expects investors in US stock indexes could take a 30% loss and that downward pressure on stock prices could continue into the summer. He advises selling on rallies rather than buying dips and otherwise protecting yourself in value stocks – particularly in the defense, cybersecurity, utilities and energy sectors and owning gold GC00.
and revenue-generating master limited partnerships.

“We’re in a bear market,” Farrell said. (Rule #8: “Bear markets have three phases – a sharp decline, a knee-jerk recovery, and a protracted fundamental downtrend.”) “Growth technology is falling out of favour; We are progressively reducing the big cap stocks that have held the S&P 500 SPX.
high. When this is over, it’s likely that they’ll all go into a major decline. If the S&P 500 falls 30%, which I think is possible, you would be down to 3,460.”

By midday on Monday, the S&P was down more than 16% from its closing record high of 4,796.56 set on Jan. 3.

“Speculation periods are followed by resolution because they usually go too far or there is not enough attention paid to fundamentals.”

For Farrell, the market’s current downturn is a natural consequence of the exuberant bull run fueled by easy money and excessive speculation. In recent years in particular, fear of missing out has lured many new, inexperienced buyers to stocks, lulled by a naïve confidence that what goes up will keep going up.

“The longer a trend lasts, the more people consider it permanent,” Farrell said. (Rule #3: “There are no new epochs—excesses never last.”) “Therefore, investors buy most of an asset, like stocks or bonds, at peaks and least at troughs.” (Rule #5 : “The audience buys most at the top and least at the bottom.”)

Bob Farell

Now the pendulum is swinging back. No one knows where it ends, of course, but you can safely rely on Farrell’s Rule #2, which states: “Excesses in one direction lead to opposite excesses in the other direction.”

As Farrell explained in the interview, “Speculation periods are followed by resolution because it usually goes too far or because there is not enough attention paid to fundamentals.” (Rule #4: “Exponentially fast rising or falling markets usually go further than you think, but they do not correct by going sideways.”)

Stock market speculation is now dissipating, but the S&P 500 SPX,
for example, is still highly concentrated, with about 25% of its returns tied to the performance of five popular tech-sector stocks.

Farrell said, “Concentrated ownership is a cyclical measure of vulnerability or future potential, depending on how concentrated or sparsely owned a sector or group is.” In other words, the US stock market was something of an inverted pyramid, a weak foundation that investors can and do ignore – until the pyramid topples.

“Similar concentrations occurred in 1970-72 when the ‘Nifty Fifty’ dominated. And 1998-2000 when Big Tech dominated,” noted Farrell. “In each of these cases, there were 10-year down cycles [after the collapse] in the concentrated leaders.”

The biggest, most popular stocks falling the most underscores Farrell’s Rule #7, which states, “Markets are strongest when they’re diversified and weakest when they’re confined to a handful of blue-chip names.” It also picks up on rule #9: “If all the experts and forecasts agree, something else will happen.”

From the MarketWatch archives: 10 investment rules tailor-made for hard markets

For the bulls to regain control, Farrell said he will be on the lookout for evidence of investor capitulation — in other words, selling pressure and large downside moves that are creating enduring progress. (Rule #6: “Fear and greed are stronger than long-term resolve.”) Looking ahead, Farrell expects value stocks, gold, utilities, and energy to emerge as new market leaders, at least in the short term, and expects major U.S. stock indices to underperform overall deliver returns. (Rule #1: “Markets tend to revert to the mean over time.”)

Of course, many index fund owners will be disappointed when this happens, which is why Farrell encourages investors to be more active in managing their portfolios. Farrell said: “We’re going from a time when the best money was made from an index fund to a time when you make money by identifying the right individual stocks and sectors. That’s what I would focus more on.” (Rule #10: “Bull markets are more fun than bear markets.”)

More: Prepare for a recession, a real estate bear market and a drop in stock prices, warns strategist David Rosenberg

Likewise: “The Fed Always Screws It Up”: This forecaster sees inflation peaking and US stocks in a bear market by the summer This Wall Street legend has seen every bear market since the 1950s. He says the one that comes could hit the S&P 500 with a 30% loss

Brian Lowry

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