- The bear market in stocks is intact and the S&P 500 is poised to fall 20% by mid-October, according to Guggenheim’s Scott Minerd.
- Minerd said a combination of poor seasonality and overvaluations bodes ill for stock prices in the near term.
- Increased inflation and low productivity suggest the economy is already in recession, Minerd said.
Investors shouldn’t get too excited about the recent rally in equities, as there could be a major decline on the horizon, according to Scott Minerd, Guggenheim’s chief investment officer.
In a Thursday tweet, Minerd pointed to poor seasonality and high valuations in a period of high inflation as reason to believe the S&P 500 could crash by 20% in mid-October. Minerd followed up his tweet with an interview on CNBC to further elaborate on his bearish views on the stock market.
“It’s really grim to see the P/E ratio where it is,” Minerd said, stressing that the current lagging P/E ratio of the S&P 500 is 19x. Since 1960, when core PCE was 4%-5% year-over-year, as it is today, the S&P 500’s P/E ratio has been trading at 15.2x.
That difference equates to a 20% drop in stock prices, which could happen quickly “if historical seasonality means anything,” Minerd said, citing the stock market entering its worst time of year.
“Given where the seasonality is and how far we’re historically out of step with where the p/e is, we should see a really sharp price adjustment very soon.”
What doesn’t help Minerd’s outlook is his view that the economy is probably already in recession, which is being ignored by most investors.
“Given the recent strength of the past few days, it seems that people are ignoring the macro background, the monetary policy background, which would basically indicate that the bear market is intact,”
“Maybe we’re already in a recession, I don’t see earnings rising dramatically, and actually I see some downward pressure on energy revenues and other sectors where we’ve had price drops,” Minerd said.
Oil prices in particular have fallen sharply in recent months, with WTI Crude Oil falling 31% since its peak in June.
Continued strength in the labor market and a healthy consumer have kept many investors from declaring that we are currently in a recession, but hope that a soft economic landing is still possible.
Not Minerd, who looks at other factors such as productivity.
“Productivity has been terrible. We’re getting more people back to work, but we’re actually seeing a drop in output per employee,” Minerd said.
“The employment indicator is lagging. We tend to see unemployment rise after the recession has started. Many of the things people are also reporting are positive in nominal terms…but at the same time inflation is so high that in real terms terms these are actually negative numbers, and that’s how we measure GDP,” Minerd said.
Minerd expects the Fed to hike rates by 75 basis points later this month, which should drastically reprice the short end of the yield curve and cause it to flip completely, a sign that has historically been a leading indicator of a contracting economy .
Taken together, these factors give Minerd confidence that the S&P 500 can trade towards a range of 3,000-3,400 in the coming weeks. And then stocks will look more attractive, according to Minerd.
“At that point, I’m a buyer,” Minerd said, arguing that positive seasonality after October and a supportive Fed amid falling stock prices should bode well for a year-end recovery that could last into early 2023.
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