- The bear market in equities is intact and the S&P 500 is on track to plunge 20% by mid-October, according to Scott Minerd of the Guggenheim.
- Minerd said a combination of poor seasons and overvaluations bodes ill for short-term stock prices.
- High inflation and low productivity suggest the economy has already entered a recession, Minerd said.
Investors shouldn’t get too excited about the recent rally in stocks, as a sharp drop could be on the horizon, according to Guggenheim chief investment officer Scott Minerd.
In a tweet from Thursday, Minerd pointed to poor seasons and high valuations in a time of high inflation as reason to believe the S&P 500 could crash 20% by 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 striking to see the price-to-earnings ratio where it is,” Minerd said, pointing out that the S&P 500’s current P/E ratio is 19x. Since 1960, when the year-over-year base PCE was 4% to 5%, as it is today, the P/E ratio of the S&P 500 has traded at 15.2x.
That difference corresponds to a 20% drop in stock prices, which could happen quickly “if historic seasons mean anything,” Minerd said, alluding to the fact that the stock market has entered its worst period of the year. ‘year.
“Given where the seasons are and how far we are historically out of line with where the p/e is, we should see a very sharp price adjustment very quickly.”
What doesn’t help Minerd’s outlook is his view that the economy has probably already entered a recession, which is ignored by most investors.
“Given the recent strength of the past few days, it seems like people are ignoring the macro backdrop, the monetary policy backdrop, which would basically indicate that the bear market is intact,” he added.
“We may already be in a recession, I don’t see earnings rising dramatically, and in fact I see downward pressure on earnings coming from energy and other sectors where we’ve had declines. of price,” said Minerd.
Oil prices, in particular, have fallen in recent months, with WTI crude oil falling 31% from its June peak.
Continued strength in the labor market and healthy consumers have kept many investors from declaring that we are currently in a recession, instead raising hopes that a soft economic landing is still possible.
Not Minerd, which looks at other factors like productivity.
“Productivity has been abysmal. We’re putting more people back to work, but we’re actually seeing a drop in output per worker,” Minerd said.
“The employment indicator is lagging. We tend to see unemployment rise after the onset of a recession. A lot of the things people are pointing to are also nominally positive…but at the same time, inflation is so high that in real terms it’s actually negative numbers, and that’s how we measure GDP,” Minerd said.
Minerd expects the Fed to raise interest rates by 75 basis points later this month, which should significantly reprice the short end of the yield curve and cause it to completely invert, a sign that has always been a leading indicator of a shrinking economy.
Taken together, these factors give Minerd confidence that the S&P 500 could trade in the 3,000-3,400 range in the coming weeks. And that’s when stocks will be more attractive, according to Minerd.
“At this point, I’m a buyer,” Minerd said, saying positive seasons after October and a supportive Fed amid falling stock prices should bode well for a year-end rally that could last until early 2023.