Check Out Sanjeev Sharma’s Framework Now
Editor’s Note: The following text is a transcript for our readers who would like to follow along.
Daniel Snyder:
Hey, Daniel Snyder here from Seeking Alpha. This is a great interview. I’m so glad that you guys are tuning in because I’m joined today by Sanjeev Sharma. He has been riding with Seeking Alpha- sorry, for Seeking Alpha since 2008. And here’s this interesting formula, where he has been predicting where the indices are going year-over-year. And I kid you not.
He has not gotten this wrong since 2009. That’s right. This year, he called the significant pullback way back, I believe it was in February. We’re going to check out the article. You guys hang out with us. Welcome to the show. Welcome to the audience Sanjeev Sharma. Thank you so much for taking time today to hang on with us.
Sanjeev Sharma: Thanks, Daniel. Thanks for having me on your show. I’m very excited.
Daniel Snyder: We’re excited. We’re over the moon thankful for you. I mean, like I said, you’ve been writing with for Seeking Alpha on Seeking Alpha since 2008. I mean, you’ve been here year-over-year, every year without fail, giving your projections for the year. Why don’t you give us a quick background on yourself? How did you get into the market and really start figuring that you wanted to share your forward outlook every year?
Sanjeev Sharma: Yeah. I first came to know about Seeking Alpha in 2008 through a friend of mine. And at that time, I was – basically, I was teaching. I was teaching at a business school in India. And so I have an MBA from Columbia Business School. I worked in many different positions. And I’m a keen observer.
I think I’m a keen observer of things and having worked in India, having worked in United States. I’ve been observing the economy, what is going on with the stock market. And I noticed certain things and I just tried to wonder basically what exactly I – it was a challenge to understand or create something which can be – which can give, like, consistently, which can consistently give a good outcome because from the beginning, I have been hearing that nobody can predict the stock market. We all have been hearing nobody can predict the stock market.
So paying that as a challenge, I tried to understand what could be the reason? And then I realized that basically the United States economy is – essentially, we all know. it is a consumer-driven economy. And 80% of the S&P 500 is basically driven by that disposable income. That means you have an average person in United States, whatever his basic needs are, like, housing, food, fuel, right? So those are the basic necessities.
Once he takes care of those, then the remaining money he can spend and that money actually fuels the stock market. So the stock market is a reflection of not the present, but the stock market is a reflection of what is expected to happen in the future.
Daniel Snyder: Right.
Sanjeev Sharma: So based on that, I tried to get the important factors and which can impact the stock market and started writing about it. So I first wrote in 2009. In 2009 May, my – was my first article. And where – if you remember, the stock market was just recently recovering at that time. And then I said, the economy will go up. The stock market will continue to go up this year. Then I was right that year. Then 2010 also, I was right. 2011 also, I was right.
So then I realized that all these factors which I’ve been using, why don’t I use statistics and create a real formula out of these? Because I was using these important factors. And the important factors are, let me just tell for the audience.
Number one is the interest rates because lot of spending, which is – which we are doing is based on borrowing. You are taking home loans, home equity loans, student loans. You are taking car loans, credit cards, all that is driven by interest rates. So that is number one factor.
The second is wages. If your wages are going up or down this year, that is very important.
Number three is gas prices. Gas prices impact everything. Based on transportation of goods to transportation of human beings to – everything is driven by gas prices.
And then number fourth is the CPI, which is basically the Consumer Price Index or so the inflation, and this is number four.
Number fifth is the home prices. How the home prices are going up. The – it actually negatively impacts. When the home prices go up, then you spend more money in the either rent or mortgage, and then the amount of money left with you is shrinking, right? So you can spend less money.
So these are the, you can say, five most important factors, which I tried to put it in a formula. I put the historical data for all of these from 1982 onwards. And from – and then from – at that time, I had from 1982 to 2008, I think it was the data I collected. And then I ran basically using machine learning. I ran and I found that I – it was giving me a good result. It’s giving me an [ask for a point four] [ph]. And that [ask for a point four] typically means that up to – that is 40%. It is, let’s say, there are 100 factors.
This sector is, like, 40% alone. that’s what it will impact. So I mean, it is not everything. If there is a sudden war, there is a sudden terrorist attack, all those things will definitely impact. But let us say those factors, discounting those factors, these five factors will impact the disposable income of a consumer and that will impact the stock market. Now I have no…
Daniel Snyder: Let me jump in here. So I love this buyback. There’s just a lot to unpack right here. I mean, you – so you have this formula that you’re talking about. You call it the disposable income methodology formula going down into these five factors and you mentioned the interest rates, you mentioned the CPI, you mentioned gas prices and everything that we’re watching the economy right now.
So I want to pull up immediately the article that you wrote this year, so that everybody can see this. So just so everybody can see, this was February 28 that you put out this article on Seeking Alpha. And for me, I don’t know why you only have 250 followers on Seeking Alpha. I mean, you’ve been doing this year-over-year and your predictions are right. It seems like more people – if you’re looking for Alpha, hello, people, this is it right here.
So you said the S&P 500 is the around 3,000 by the end of 2022. And so I know after the CPI numbers we just got for October and seeing how the market is reacting, I mean, we’re seeing a huge explosion to the upside. I’m kind of curious, I got to challenge you. Do you still think that we’re going to see S&P 500 go to 3,000 level by end of the year?
Sanjeev Sharma: Yeah. No. Actually, if you look at it, there is a – I used a lower number there, but if you look at the article at the end of it, it says the middle part. The article said it will go between minus 9% to minus 40%. So, basically, the average of that is minus 25%, which is 3,600 is the number I predicted, you know?
So let me tell you that all these people are very happy today because the inflation is 7.7%, right? So people are very…
Daniel Snyder: Still way too high, right?
Sanjeev Sharma: Yeah. So let me tell you where we started. I think people are forgetting where we started this year. When we started this year, inflation was 7.5%. And from January to November, when the federal funds rate has been increased by more than 3%, right, from 7.5%, it has not gone down. It has gone up to 7.7%. So what is this euphoria or happiness about? I don’t know.
So, yeah, it has come down from 9%, I understand. In the middle of the year, it was 9%. But if you look at it, if you compare these numbers with two years back, you are easily like a 17%, 18% higher compared to two years back. So if the federal reserve had to increase interest by 3% and still the – in 11 months, the inflation is instead of 7.5% compared to – the 7.5% was compared to the twelve months before that, right? It has – still, it is 7.7% today. Do you think we should be very happy?
Daniel Snyder: It’s a great question. I mean, inflation is still high. Housing prices are still high, right? They’re starting to pull back a little bit, but they’re still elevated, and you’re talking about disposable income, any higher mortgage payments, higher rents amount, that takes away your disposable income. Diesel prices are still high, grocery prices are still high. Egg shortage is around the country if you’re looking for eggs. It seems like people are getting a little…
Sanjeev Sharma: There’s shortage for everything. Yeah, there’s shortage for everything.
Daniel Snyder: Yeah. So I mean, it kind of sounds and correct me if I’m wrong. I mean, I don’t know if you’ve done your framework for next year yet, but it sounds like this might be just another bear market rally. What are your thoughts?
Sanjeev Sharma: Yeah. I would think so. I mean, I would still continue to be – I would not – I never talk about short-term, but I still stand by what I said in the beginning of the year. That is that this year, the stock market will be down. And see, if you look at the last recession that is a 2008 one, at that time, the inflation was 4.5%, right? It went up to 4.5% and federal reserve started increasing interest rates from 1% in the middle of, I think, 2004, to around, I think, to at least for another two years, they kept increasing it. And from 1%, it went to 5.25%. And it was there for one year.
For one year, they kept it at 5.25%. And after the one year, the entire stock market started collapsing, the economy started collapsing, and the inflation went down. So it took three years for them to create this – to bring the inflation down from when the inflation was only 4.5%. This time, the inflation was 7.5% to, in fact, the highest was around 9%, right? So why do we think the inflation will come down that faster, I don’t understand.
Daniel Snyder: Yeah, I mean…
Sanjeev Sharma: Last time when – I mean, the last session, that to bring the inflation down from 4.5% there to increase the Fed funds rate to 5.25%, now the inflation numbers are – today is 7.7%, and the Fed funds rate is still less than 4%, I would say. Do you think the interest rates will go up or will not go up? That’s the question.
Daniel Snyder: Yeah. I mean, that’s the question that the bond market is trying to figure out. We’ve been watching the whipsaws of the yields, right? But I want to go back before we let you go here. I want to go back to the article because I really want to make sure people see what exactly you are breaking down within your article every year.
So I’m going to scroll down to the bottom here and everybody can go check this out, obviously, on their own time as well. But you mentioned the best case and the worst case, right? You were mentioning the different, what was it? The negative 8 and the negative 40, right? You were just calling that the market was going to pull back significantly. You pointed out halfway through is about the negative 25%. And this is you breaking down for everybody, so that they don’t even have to do it. But if they want to, obviously, they can learn from you. I mean…
Sanjeev Sharma: Yeah. I publish the article sometime at the end of January, middle of February or at the end of February, basically, around that time. Yeah. So this is the – the important thing is if you use a single factor and try to predict, you can be wrong and even I can be wrong, anybody can be wrong, basically looking at a single factor.
But when you use a combination of these factors, then generally, even if you’re wrong in one factor, maybe the other factors you are not wrong. And so then the probability becomes higher that you’re right. That’s the advantage of the formula instead of relying on a single formula. So that’s what it is basically, I mean, on a single factor.
These five factors impact the disposable income. And I try to estimate that’s the important – that’s the reason why this formula has been so successful compared to other machine learning. You see a lot of people are using machine learning artificial intelligence, but they are not able to create anything which can be so successful year-after-year.
And the reason for that is that basically people try to look at the existing factors. People try to look at the factors today to predict future, but it does not work because the factors for this year are not the same as factors for next year. And so what I did was I tried to get these five factors, guesstimate these factors based on which you can create pretty much. It is pretty easy to understand the direction of these factors.
By the – in the beginning of the year, you can know, like, in the – like, for example, this year, you’re talking about this year, right? So this year, we pretty much knew inflation is high. So interest rates can go up. We knew that. I was – I don’t think I would predict these high interest rates to go up. I thought they will not go up this.
I thought they will go a little bit or they may not even increase because the last time in 2008, when they increased – when they were very aggressive over the interest rates, basically, the stock and entire economy collapsed. So I would not say that I was 100% correct that I was not expecting the interest rates to go so much, but they did go.
But wages, I knew. Wages look like they are going up. But the fact of the matter is the wages are not – last year – compared to last year, you are missing what is called as a stimulus. Last year, every family got a stimulus around between $6,000 to $8,000. Some family can go based on the size of the family and people got $10,000 stimulus.
A stimulus is huge because if the average – if you look at the average family and – in United States, they’ve got $6,000 to $8,000 extra. What kind of a purchasing power increase it is? It’s a huge help and that fueled the economy last year. Now this year, there is no stimulus. So that $6,000 to $8,000 has been removed from those families. So I know the wages are going up because of lack of stimulus this year. Basically, the net impact is it’s a lower wage for a lot of people.
Daniel Snyder: Sanjeev, I want to ask you that, I mean, so I know personally, I’ve been surprised with how resilient employment numbers have been. Is this something that’s kind of – were you anticipating this? You’re talking about the wages continuing to go up, but we’re just now starting to see more and more tech layoffs coming through the system.
I think a lot of people thinking in about how interest rates would go up, the price of inflation is making everything go up, and companies might not be able to afford all their workers anymore. I think we were all expecting unemployment numbers to take up faster than they have. What were your thoughts on that?
Sanjeev Sharma: Yeah. The fact is that there are two important things for this employment numbers. One is the number of people who are retiring. The number of people retiring has gone up dramatically. I don’t remember the recent numbers, but they were 12,000 to 13,000 people retiring every day.
So when 12,000 to 13,000 people retire every day and you have to find the replacement, it is difficult. So that’s why the – if you look at the number of jobs open is around 10 million in United States, which are open jobs. And the number of available workers is probably less than that – much less than that. Not probably, but I know it’s less than that. So that way, we just have to go up.
And the second thing is what we saw in 2008. There’s a difference between 2008 and now. In 2008, wages could not go up because outsourcing was a norm. All corporations were outsourcing jobs to either China or India. And that was considered a very good thing those days. But now because of the new geopolitical situation, people, I mean, lot of corporations preferring in-sourcing.
So the jobs – job outflow is not at the same speed. And we have noticed that in situation like the pandemic happened, there was supply chain problem. The supply chain problem is still there. The inflation is happening because of – not because of United States, but because of China because as you very well know, they are not using a Western – they are not using Western, what do you say, vaccines there, and they are suspicious of those.
So their solution is putting lockdowns. They’re continuously putting lockdowns. So there is a supply chain disruption. and that’s why the inflation is high. So looking at all that the people here are realizing that maybe the outsourcing were not a great idea.
Daniel Snyder: I mean, I just got to – Sanjeev, I got to point it out again. I mean, hindsight is 2020, right? You put this article out in February, just a few days after Russia started their invasion as well. And no one in the world probably knew how much that was going to impact the global economy as well with commodities and everything else and driving inflation, like. But you were so confident in the formula that you put together that you were like, oh, this is happening. And you’ve been doing it every single year.
So I just encourage everybody that’s watching right now. Go check out Sanjeev’s page on Seeking Alpha. Go to his author profile. Give him the follow. because you will get his article for next year when he publishes it in January or February.
Sanjeev Sharma, thank you so much for taking the time today and walk us through your framework. We really appreciate it. And, I mean, this formula, guys, go check it out. He breaks it down the five different factors that he takes, he consolidates, he puts it into the article for you. If you don’t want to wait, maybe you can try to start to mess with the factor numbers yourself and figure it out before you can. But anyways, good check it out Sanjeev Sharma, everybody. Take care. Daniel Snyder here. See you next time.
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