“Stocks Likely To Crater From Here,” read the subject line of an email that landed in my inbox last week.

“Sequestration cuts, weakening GDP growth, higher taxes and high gasoline prices are all but a few reasons why author and economic researcher Chris Martenson PH.D foresees the stock market likely to plummet within the coming months,” it warned.

I usually ignore such hyper-specific emails, but I gave this one a look for one reason: I feel better about the economy now than I have in a while, and in an attempt to avoid confirmation bias, it’s always best to bounce your thoughts off someone who disagrees with you.

So Chris and I exchanged a back-and-forth chat about the economy and investments. Here’s the transcript, condensed for clarity. 

Morgan Housel: You cite an increase in taxes and gas prices as a reason you expect stocks to plummet. But the last time we raised taxes in the early 1990s, stocks surged. Same with tax hikes in the 1950s. And gas prices are up 40% over the last three years, yet stocks are up by more than a third during that time. I’m not saying it’s causation; just that the relationship is much more complicated than we often think. I just don’t see the evidence that higher taxes or higher gas prices automatically lead to poor stock returns. (And for what it’s worth, gas prices have been falling for a month now).

Chris Martenson: My thinking here is that stocks do respond poorly to are falling earnings and recessions are a powerful driver for falling earnings. Rising energy prices are well correlated with recessions and so I see high gasoline prices as a headwind to economic growth. The US economy is barely above stall speed when measured in terms of real GDP, and is a tick below the 3.7% nominal growth threshold that has been breached in every recession stretching back to 1980 (and at no other times, I should note). It is in the context of a weak economy that I wish to observe that the recent tax hikes and spending cuts of the US government provide yet more recessionary weight to the current environment. 

Morgan: So the call, then, is for a looming outright recession? I agree that recession would be bad for stocks, of course. And while you can never rule out the possibility of a recession — we’re very bad at predicting them — the negatives of higher energy prices and tax hikes can be countered by a number of things going right in the economy. Housing starts are rising at an annual rate of more than 25%, and will likely keep rising given low inventory and demographic trends. Household debt payments as a share of income are at a three-decade low, and there’s evidence that consumer deleveraging is now complete. Energy production is booming. The near-stagnant GDP growth in the fourth quarter was almost entirely due to a big pullback in defense spending, which itself was the echo …read more

Source: FULL ARTICLE at DailyFinance