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- David Hunter reiterated his call for a sharp drop in stocks ahead.
- He said he expects the S&P 500 to drop as much as 80% from its peak.
- Hunter said cutting the Fed would trigger the crash.
Investors seem nervous. And maybe rightly so.
Stocks were up 90% from last year and a half lows, an extraordinary bull run. Many evaluation measures show a historical over-extension. The Federal Reserve is preparing to reduce its asset purchases. Yields on Treasury bonds are expected to rise. The pandemic is not yet completely under control. The near collapse of Chinese real estate company Evergrande sent shockwaves throughout the global financial system.
The list goes on.
Many prominent Wall Street strategists have said in recent weeks that some sort of pullback is coming.
The performance of stocks over the past few weeks has reflected this cautious outlook. The S&P 500 is down about 4.5% from its Sept. 2 high at 4,536. The lagging performance has raised questions as to whether or not the market has peaked.
But according to David Hunter, the chief macro strategist at Contrarian Macro Advisors, the fact that there is shyness on Wall Street and among investors right now indicates that stocks have yet to peak in this period.
bull market
cycle.
“Everyone on Wall Street, and like you say a lot of people on Main Street, focus on the markets at the top or the markets beyond the top or just at the top,” Hunter said during an episode of September 27. Podcast Stories. “And I think when you get that kind of mindset or that kind of story that is so popular, you know you’re probably not there.”
Hunter believes the S&P 500 will hit 5,000, a level he adjusted higher earlier this year from his initial forecast of 4,500.
But it will collapse when the
Federal Reserve
is starting to shrink its balance sheet and cut back on asset purchases, Hunter said. And he expects the pullback to be significant: up to 80% peak to trough.
“We’re going to see more wealth destruction next year, I think – once we get through that last move – than we’ve ever seen,” he said.
As for the timing, Hunter wouldn’t give a specific date, although it appears he expects a crash in the coming months. He has said in recent months that he expects this to happen around Q4. He also said that inflation continuing to rise above the Fed’s expectations would cause the central bank to fall more aggressively and faster than investors had anticipated.
After the crash, however, Hunter says fiscal and monetary stimulus efforts will help stocks rally quickly.
From now on, the Fed is expected to start shrinking towards the end of the year, reducing its balance sheet by $ 15 billion per month from the current amount of $ 120 billion per month.
Hunter’s perspective in context
Hunter’s call for an 80% stock crash is marginal and is said to be one of the biggest drops in history. Such a large withdrawal has only happened once in history, during the years of the Great Depression. The S&P 500 has fallen 57% from its peak in the 2008 crisis and 34% in the COVID-19 crash.
But again, most Wall Street people seem to share his bearish sentiment to some extent, and a 15% drop from recent highs, for example, wouldn’t necessarily surprise much.
In addition, the stocks are in an unprecedented situation. The Fed’s balance sheet is the largest since the start of quantitative easing following the global financial crisis, which, combined with its zero interest rate policy, has supported valuations at historically high levels. Withdrawing that liquidity could very well trigger a slowdown.
Federalreserve.gov
Gurufocus.com
At the same time, tapering has been on the minds of investors for months, so it may already be embedded in stocks to some extent. Plus, with the Fed willing to reduce signals that it thinks the economy is in good enough shape to do so, which means stocks probably shouldn’t suffer as much.
So anyone can guess how the market reacts once the Fed actually starts to decline. But if Hunter’s call is even half correct, investors would do well to keep his warning in mind.
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