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Permabull investor Tom Lee is calling for a massive drawdown followed by the rally of our lifetime. I would really love to see it. And he's mainly highlighting the uncertainty around the new Fed chairman. Well, whenever we have a new Fed chairman, 10 out of 13 new Fed chairmen have triggered a 10% plus drawdown in their first year.
And if you look at his chart, it's actually very accurate. We had a 20% drawdown with Jerome Powell in his first year. With other Fed chairmen like Alan Greenspan, we had a 35% drawdown. Others, we had up to a 45% drawdown. So, it could be much worse than 10%. But on average, it's about 10 to 15% especially when you have Kevin Warsh during his latest testimony saying that QE, which is mainly printing money or monetizing the balance sheet, is like QE is reverse Robin Hood.
It's policies that steal from the poor and gives to the rich. So, when you have someone that's saying that, I think it's really going to freak out the market. And I think someone like Tom Lee could potentially end up being right, especially if you look at the implications of the balance sheet relative to the S&P 500.
And whenever the Fed is expanding the balance sheet, it expands the money supply. And as money supply expands, more money finds its way into the economy and ultimately helps the S&P 500. You could see the close correlation between the S&P 500 and the M2 money supply, which is the white line. Once it was contracting in 2022, we faced some trouble.
Once it's expanding, the S&P does really well. So, there's a very close correlation between the M2 money supply and the S&P 500. And the M2 is pretty much affected by the Fed balance sheet, which Kevin Warsh is not a big fan of. Now, you also have some euphoria in the market. I would say mainly in semiconductors.
I think semiconductors are kind of in bubble territory right now. They're getting too expensive. They ran too soon, too fast. They're one of the most overbought they've ever been. And I think that's a really frosty area in the market that could potentially suffer in a correction. And even the S&P itself, we just went back to 21 times earnings.
We barely went to 19 times, we went back to 21 times. So, there's a lot of room for a potential 10% pullback. If we were trading at 17 or 18 times earnings, I'm like, I don't know if I see a 10, 20, 30% pullback. But in terms of where we are right now in terms of the setup and the valuations and the euphoria in semiconductors, the SpaceX IPO, and all these things, well, I think there's potential for that.
And I think it's very, very possible. And it's quite reasonable that whatever Tom Lee is saying in terms of the S&P 500 revisiting 7300, this is his target. And after 7300, it could go down up to 10%. We would pretty much refill the gap. And after we refill the gap, then we go much, much higher. I think that's actually very reasonable and it could potentially happen.
But there's a few things that are making me doubt Tom Lee's prediction that this could happen and we could have a big drawdown. One of them is the uncertainty around Kevin Warsh himself. Now, Kevin Warsh is really against, you could say, expanding the balance sheet, but he really wants to cut interest rates.
That's why the president wants him in cuz he wants to cut interest rates. So, based on his latest interview, he's saying that AI is going to make almost everything cost less. He's saying we're at the forefront of a productivity boom. Economic growth won't be inflationary. So, he's pretty much setting the stage to potentially cut interest rates.
Now, if he does cut interest rates, this is really bullish for the markets and it's really bullish for everything in general. But if he's cutting interest rates while shrinking the balance sheet, I'm not too sure of what will the market reaction be. Is it going to be bullish and then people take it as we have lower rates and everything is fine?
Or is it going to be a little bit bearish because we know what happened whenever Jerome Powell tried to shrink the balance sheet in 2018. I was investing back then. Apple went to 13 times earnings and we had a pretty sharp pullback followed by a sharp recovery. And it could potentially happen again.
We don't really know. But again, Kevin Warsh is just one vote. There's other Fed chairmen on the board. And question is, could he convince them to potentially cut interest rates whenever you have inflation above 3%. So, there's a lot of uncertainty around that. The second one is President Trump and his administration.
They're watching the markets 24/7. I've never seen anything like it. But whenever the market makes a new high, the official account of the White House is posting the S&P 500 and Nasdaq sitting at all-time high. They're watching the markets all the time. I even watched the press conference of the Secretary of War.
Whenever he was giving a briefing on the war, it was like on 8:00 or 9:00 in the morning. He's saying, "Yeah, that's why the markets are up." I'm like, "Why are you watching the market?" Like, "Why is everyone watching the market?" There's a lot of other things that matter. It's not just the market.
But this administration is so focused on the market that it's really hard to bet against it. I mean, there's a saying that says, "Don't fight the Fed." So, whatever the Fed does, don't fight the Fed. Well, in this case, should we fight the government then? If the government wants the S&P higher and the market higher into the elections, should we really fight them?
So, if it wasn't for this administration, I'm like, "Okay, what Tom Lee is saying here makes 100% sense. We could go down 10, 20%. The valuations are high. We have runways. If we have the fuel to go down 10 or 20% from 7300 or whatever it was." But you have this administration that's so focused on the market that it's almost it's just it's almost foolish to kind of bet against them.
And that kind of happens pretty much in every single year of Trump's year. Where we go down March and April, this is where we are right now. And then we recover in the end of the year, especially once we have elections or we have something that's really, really important. The last bullish point I would like to highlight is the chart patterns of the S&P 500.
So, I've been investing for a while and I've noticed that whenever the market experiences a decent drawdown, 8, 10%, you could say, a little bit more, especially in individual stocks this time around, they were down 50, 40, 30%. Once you experience such a drawdown and we make a new high, people start saying, "Oh, this is a dead cat bounce.
Oh, this is a fake out. This is all these things." But whenever the market makes a new high, you have so much support from the algorithms. And the algorithms are programmed to buy those stocks that we tend to have pretty long runways, like 10, 11, 12 months, sometimes a year, sometimes two years. And you can see the pattern here.
We went down in 2018, just what I told you right now. Where we recovered, once we made a new high, we kind of struggled out and we continued to make new highs for the next year, year and a half. Same thing after 2020, once we made a new high, we started getting from the algorithms and we tend to have a run.
We had about a year and a half kind of run. After 2022, we made a new high and then we started running. We ran for almost two years. We had some pullbacks, but it wasn't anything crazy. Then in this one around in last year of April, we made a new high and we ran for about another year, pretty much, year, almost a year.
And then we had a drawdown. We just made a new high. So, I would guess we at least run for 8 months, 10 months, a year, year and a half. So, I don't personally agree with Tom Lee over here. I think we could have a drawdown, we could have a pullback, but I'm not saying what he's saying that we're going to go from This is the chart from 7300 all the way down to like 6700 and back to 7700 into November.
We have the elections. I think the administration will do whatever it takes to maintain the S&P 500. And I agree that there's a lot of euphoria. I agree that semiconductors are expensive and things are expensive. But if I had to think of some kind of a time where we could potentially have a really big move, it has to be in 2027.
Because in 2027, if a SpaceX would have already IPO'd, we don't have any elections, we don't have anything going on. So, either we're going to have the rally of our lifetime or we're going to have the crash of our lifetime. I think it's going to happen in 2027. But between now and then, I think the market will be in this range, will be a little bit more stable.
But regardless to say, I believe again the market is a little bit expensive. I have some cash on the side. I did buy the dip over the last few weeks. Maybe I didn't buy enough, but that's okay. And I am just being a little bit cautiously optimistic, you could say. And I'm watching the markets, watching valuations, and watching for opportunities.
I don't try to time the market, but I like to look at those things, see where we are in the cycle, and determine if I should be more aggressive or I should be more defensive. And I believe for now, I'm being a little bit more cautiously optimistic and I'm just mostly invested and watching see what happens.
So, that was my opinion on Tom Lee's market call. Hope you enjoyed it. It was not financial advice. If you did enjoy it, please press the like button and maybe consider subscribing. So, I'll talk to you in another video.
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