Emotion, not fundamentals, is driving stock gains, and a recession could send stocks down more than 30%, market vet says

• Plowing cash into this type of stock market could be a “mistake,” B. Riley Wealth’s Paul Dietrich said.

• While inflation has cooled from its highs, not all is well in the “wonderland” economy.

• A mild recession could send S&P 500 tumbling by more than a third, Dietrich said in a note.

The stock market is being driven not by fundamentals, but by investor emotion and the fear of missing out — and a recession could send the S&P 500 plunging by as much as 30%.

That’s according to Paul Dietrich, the chief investment strategist of B. Riley Wealth Management, who’s warned before of a recession and a bear market that could strike the economy this year.

Stocks have continued to soar so far in 2024, with the S&P 500 recently surpassing the 5,000 mark for the first time ever. But investing in this kind of stock market is always a “mistake,” Dietrich warned, as it’s mostly being fueled by investor hype.

“So many investors get caught up in the excitement, momentum, and enthusiasm of a stock market that is running like the Kentucky Derby,” Dietrich said in a note last week. “It is that irrational Fear Of Missing Out, or ‘FOMO,’ that fuels this behavior.”

A closer look beneath the surface shows that not all is well in the “wonderland” economy, Dietrich added.

Unemployment remains near a historic low, but has steadily ticked higher over the past year as more firms dole out pink slips. Layoffs and firings rose slightly to 1.6 million in December, according to the Bureau of Labor Statistics.

Consumer spending has remained strong on paper, but there are signs that Americans are simply funding their purchases with credit card debt to fight rising inflation. Household debt now stands at a record $17.5 trillion, according to Federal Reserve data.

“Similarly in 2000 and 2008, a large percentage of consumers hit their credit limits and consumer spending dropped dramatically. This…