Faber Sees ’87-Type Crash If U.S. Stocks Rise Without QE3

Investment Analyst Marc Faber
Marc Faber, investment analyst, speaks during a television interview in New York. Photographer: Jonathan Fickies/Bloomberg

U.S. stocks may plunge in the second half of the year “like in 1987” if the Standard & Poor’s 500 Index climbs without further stimulus from the Federal Reserve, said Marc Faber, whose prediction of a February selloff in global equities never materialized.

“I think the market will have difficulties to move up strongly unless we have a massive QE3,” Faber, who manages $300 million at Marc Faber Ltd., told Betty Liu on Bloomberg Television’s “In the Loop” from Zurich today, referring to a third round of large-scale asset purchases by the Fed. “If it moves and makes a high above 1,422, the second half of the year could witness a crash, like in 1987.”

The Dow Jones Industrial Average plunged 23 percent on Oct. 19, 1987 in the biggest crash since 1914, triggering losses in stock-market values around the world. The Standard & Poor’s 500 Index plummeted 20 percent. The Dow still closed 2.3 percent higher in 1987, and the S&P 500 advanced 2 percent.

“If the market makes a new high, it will be a new high with very few stocks pushing up and the majority of stocks having already rolled over,” Faber said. “The earnings outlook is not particularly good because most economies in the world are slowing down.”

Profit Growth

More than 69 percent of companies the S&P 500 that reported results since April 10 have exceeded analysts’ forecasts for per-share earnings, according to data compiled by Bloomberg. Profits are due to increase 3.9 percent in the second quarter and 6 percent the following period, estimates compiled by Bloomberg show.

Faber said a third round of quantitative easing would “definitely occur” if the S&P 500 dropped another 100 to 150 points. If it bounces back to 1,400, he said, the Fed will probably wait to see how the economy develops.

The S&P 500 rose 0.3 percent to 1,358.77 at 12:03 p.m. in New York today as U.S. initial jobless claims fell last week to a one-month low. The gauge has dropped 4.3 percent from a four-year high on April 2 after some economic reports missed forecasts.

Equity markets this year resemble 1987 as they had a “very strong start” followed by a “correction,” Faber said in an e-mailed response to questions today. “If we have a rally into August it could resemble 1987 with a crash in the fall.”

On Dec. 2, Faber said global markets may drop in February and the chances of a medium-sized recession are high. The MSCI World Index climbed 4.8 percent that month after surging 5.7 percent in January.

‘Off the Table’

Faber said investors should “take some money off the table” on Feb. 21 as stocks were “overbought.” The S&P 500 increased 4.2 percent through April 2.

Faber had said in an interview with Bloomberg Television on March 9, 2009, that it was “very difficult to see a scenario where you wouldn’t make any money” owning stocks over the following 10 years, while also warning the S&P 500 might lose 26 percent before the bear market ended.

In March 2007, he had said the S&P 500 was more likely to fall than rise because the threats of faster inflation and slower growth persisted. The S&P 500 then climbed 10 percent to a record 1,565.15 seven months later, and ended the year up 3.5 percent.

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