- The bear market in equities is intact and the S&P 500 is poised to drop 20% by mid-October, according to Guggenheim’s Scott Minerd.
- Minerd said a combination of bad seasons and overvaluations bodes badly for share prices in the near term.
- 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 big drop could be looming on the horizon, according to Guggenheim chief investment officer Scott Minerd.
In a tweet from Thursday, Minerd pointed to poor seasons and elevated valuations amid a period of high inflation as reason to believe the S&P 500 could drop 20% by mid-October. Minerd followed up his tweet with an interview on CNBC to further amplify his bearish views on the stock market.
“It’s really shocking to see price-earnings where it’s at,” Minerd said, noting that the S&P 500’s current P/E ratio is 19x. Since 1960, when year-over-year core PCE was 4% to 5%, as it is today, the S&P 500 P/E ratio has traded at 15.2x.
That difference represents a 20% drop in stock prices, which could happen quickly “if historical seasons mean anything,” Minerd said, alluding to the fact that the stock market has entered its worst time of the year. .
“Given where the seasons are and how far we are historically from where the p/e is, we should see a very strong adjustment in prices very quickly.”
What doesn’t help Minerd’s outlook is its view that the economy has probably already entered a recession, and that is being ignored by most investors.
“Given the recent strength over the last few days, it seems that people are ignoring the macro context, the monetary policy context, which would basically indicate that the bear market is intact.”
“It’s quite possible that we’re already in a recession, I don’t see earnings rising dramatically and in fact I see some downward pressure on earnings coming from energy and other sectors where we’ve had price declines,” Minerd said.
Oil prices in particular have been affected in recent months, with WTI crude oil falls 31% from its June high.
The continued strength of the labor market and a healthy consumer have prevented many investors from declaring that we are currently in a recession, instead holding out hope that an economic soft landing is still possible.
No Minerd, which analyzes other factors such as productivity.
“Productivity has been abysmal. We’re getting more people back to work, but we’re actually seeing a decline in output per worker,” Minerd said.
“The employment indicator is lagging. We tend to see an increase in unemployment after the recession started. A lot of the things that people point out are also nominally positive … but at the same time, inflation is so high that in terms These are actually negative numbers, and that’s how we measure GDP,” Minerd said.
Minerd hopes that The Fed will raise interest rates by 75 basis points later this month, which should dramatically shift the price of the short end of the yield curve and lead to a full reversal, a signal that has historically been a leading indicator of a shrinking economy.
All in all, these factors give Minerd confidence that the S&P 500 could trade in a range of 3,000-3,400 in the coming weeks. And that’s when stocks will look most attractive, according to Minerd.
“At that point, I’m a buyer,” Minerd said, arguing that positive seasons after October and a supportive Fed amid falling stock prices should bode well for a year-end recovery to come. could last until early 2023.
Guggenheim
