The Stock Market Is Due For A Correction (And So Is Private Equity) | Jared Dillian

Episode Summary

Executive Summary: Jared Dillian turns sharply bearish on U.S. stocks, arguing that extreme bullish sentiment, technical sell signals, and a deteriorating macro backdrop mark the start of a larger correction or bear market. He favors shorting equities, especially Blackstone and U.S. markets, while preferring international stocks, bonds at the front end of the curve, gold, and a diversified “awesome portfolio” over pure index investing, which he says people can’t emotionally withstand.

Main Topics: Bearish turn on U.S. equities (Priority: 5/5): Dillian argues the market has entered a new downturn after a year-long rally, citing extreme bullish sentiment, technical sell signals, and recession risk as catalysts for a major decline. Shorting Blackstone and market structure concerns (Priority: 4/5): He singles out Blackstone as an expensive, sentiment-driven trade vulnerable to a risk-off unwind, and says he plans to short it via long-dated puts and S&P futures. Rates, yield curve, and recession outlook (Priority: 5/5): He remains bullish on bonds/short rates, expects Fed cuts, and says the long-delayed recession will arrive after an unusually long yield curve inversion. International over U.S. asset allocation (Priority: 4/5): Dillian prefers overseas equities over U.S. stocks, citing valuation asymmetry and mean reversion potential across Europe, India, Argentina, and emerging markets. China bearishness and political risk (Priority: 4/5): He is extremely bearish on China, arguing that authoritarian control, weak property rights, and political risk make Chinese equities structurally unattractive. Personal finance philosophy and the 'awesome portfolio' (Priority: 5/5): Promoting his book No Worries, he argues stress-free finance comes from managing big decisions, not obsessing over coffee or small expenses; he favors a diversified portfolio over all-stock indexing. Behavioral finance and irrationality (Priority: 4/5): He says people misjudge small versus large risks, over-focus on headline trades, and need frameworks that account for emotion rather than pretending to be perfectly rational.

Key Arguments: Sentiment has become extraordinarily bullish, with widely watched bullish signposts and a Demark sell signal suggesting the rally is vulnerable. The market has likely already topped and could be beginning a significant bear market tied to recession risks, especially housing and manufacturing weakness. Blackstone looks expensive on conventional valuation measures and may be a prime candidate for a sentiment unwind in private equity. The Fed has likely overtightened and will have to cut rates; Dillian expects lower yields and a more normal curve over time. A recession is still likely after an unusually long yield curve inversion, but it should be milder than 2008. International equities may outperform U.S. equities due to valuation discount, mean reversion, and better risk-reward. China is structurally unattractive because political and property-rights risks overwhelm cheap valuations. Most people should not rely on pure index funds because they cannot tolerate the drawdowns; diversified, lower-volatility portfolios improve staying power and compounding. Big financial decisions matter more than cutting small luxuries like coffee; increasing income is often more effective than extreme austerity. Personal finance advice should harness irrationality rather than pretend investors are fully rational.

Data Points: S&P move cited: From 4,150 to 4,700 - Dillian says he missed the earlier rally from October into year-end. Blackstone market cap: $156 billion - Used to illustrate how large and expensive Blackstone is relative to traditional financial firms. Blackstone valuation: 54x P/E - Dillian cites this as evidence the stock is expensive. Citigroup market cap comparison: $97 billion - Blackstone is described as larger than Citigroup despite being a private equity firm. Fed cuts expected: 3 cuts next year - He says markets are pricing cuts because the Fed over-tightened. Core PCE inflation: 2.3% - Used to argue the Fed has room to ease. Yield curve inversion duration: About 18 months - He says this is the longest inversion without a recession in modern memory. 10-year Treasury target: 3.5% - Dillian’s long-run view for the long end of the curve. 2-year Treasury target: 2.5% - Dillian’s long-run view for the front end of the curve. Volcker comparison: Powell raised rates faster than Volcker - He argues the rapid tightening helps explain why inflation fell. 1981-82 recession GDP: Minus 6% GDP - Referenced as the kind of severe recession needed to fully crush inflationary psychology. Kidnapping statistic: 115 children per year - Example of how people overestimate rare risks. Lightning statistic: 80 people per year - Used to compare perceived versus actual risk. Car accident deaths: 35,000 per year - Contrast with low-probability fears like stranger kidnapping. Awesome portfolio allocation: 20% stocks, 20% bonds, 20% cash, 20% gold, 20% real estate - His suggested stress-reducing, diversified asset mix. Awesome portfolio return: 8.1% since 1971 - He uses this to show it nearly matches S&P-like returns with lower volatility. Awesome portfolio volatility: Half the volatility of an 80/20 portfolio - Presented as a key advantage of diversification. Awesome portfolio max drawdown: 12% in any given year; 9.5% in 2008 - Used to argue the strategy is emotionally survivable. Small-cap turnaround: 52-week low to 52-week high in 48 days - A Bespoke data point he cites as evidence of strong recent small-cap momentum. China regional basket: FRDM excludes China, Russia, Turkey, and others - Mentioned as an example of a freedom-oriented emerging markets approach. Gold starting point for backtest: 1971 - He notes this is when private ownership of gold became possible in the U.S.

Pivotal Quotes: "Very bearish." — Jared Dillian: His immediate response when asked whether the highs are in for stocks. "I think this is the beginning of a pretty big bear market." — Jared Dillian: Explaining why he thinks the market’s rally has ended and recession is next. "The goal is to take your irrationality and to harness it in ways that are useful." — Jared Dillian: Describing his philosophy on personal finance and investing.

Implications: Listeners should expect Dillian to favor caution in U.S. risk assets, selective shorts, and more diversified, volatility-aware portfolios. If his recession call is right, lower yields and international outperformance could follow, while China and expensive sentiment-driven names may remain vulnerable.