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- Stocks have fallen in recent days amid rising yields on 10-year Treasuries.
- 48-year-old market vet David Hunter says this is temporary and stocks will melt in the second quarter.
- But the overheating will cause the Fed to tighten, Hunter said, triggering an 80% drop in stocks.
- Visit Insider’s Business section for more stories.
Stocks appear to be at a crossroads.
After hitting new highs in mid-February, they have hesitated over rising interest rates as yet another stimulus package fuels further inflation fears and rising vaccination rates give hope a complete economic reopening in the near future.
With valuations still overexploited by many metrics, should stocks continue to slide? Or will investors learn to tolerate rising rates? Or, should rates take a break, pushing up inventories?
Ask 48-year-old market veteran David Hunter, and he’ll tell you this is the third storyline that’s going to unfold in the coming months. Hunter, who is the chief macro strategist at Contrarian Macro Advisors, told Insider on Wednesday that last week’s stock pullback was a temporary break in a larger merger that will continue in the months to come.
Hunter said 10-year Treasuries are currently oversold (yields rise when bond prices fall). And in the next few months, he expects their returns to reverse and drop to 1.15-1.2% from current levels above 1.5%. At the same time, he predicts stocks will experience huge gains: the S&P 500 will rise to 4,600, the Dow Jones Industrial Average to 37,000 and the Nasdaq to 17,000.
But that’s when things will get worse. Hunter said he believes inflation will rise in the second quarter as the economy picks up. This would cause the Fed to start tightening its policy, pushing 10-year yields down to 2.5% and 30-year yields to 3%.
But the sudden series of events in a broader economic backdrop that remains fragile will cause stocks to fall by 80% in the months that follow, he said, adding that the Fed’s actions would eventually risk falling. push the world economy into a deflationary crisis. .
“You’re going to see as we open up the economy more signs that things are in fact overheating. It’s ironic because we were in
recession
a year ago, ”said Hunter, attributing his prediction to fiscal and monetary stimulus efforts.
“Right now, if you listen to Jay Powell, they’re saying, ‘Oh, we don’t think we have to tighten things up anytime this year,’” he continued. “I think it’s going to be accelerated by the time you get to the middle of the year, because they’re going to look and say, ‘Wow, inflation is going up a lot faster than you expected. Wow, the economy is actually showing signs of overheating. And wow, the market is at 4,600 and we have junk bonds, people are piling up. “”
Hunter added that “we are in a very unusual situation” because of the potential for economic overheating to come due to the recovery while the economy is at the same time fragile with relatively high unemployment. He said this fragility will make the economy and markets more sensitive to Fed tightening.
But Hunter said the same thing that will trigger the pullout – the Fed’s monetary policy moves – will also help present investors with a huge opportunity on the other side.
He said the potential drop in inventories and the economic crisis would lead to even bigger monetary and fiscal stimulus efforts than last year. This will cause stock prices to soar, he said, and start an industry-driven economic recovery.
“The simplest part of my forecast is to predict how politicians and central bankers will react,” he said.
Hunter is also bullish on gold and silver in the inflationary environment he expects. He said he expects gold to drop to $ 2,500 an ounce and silver to $ 45-50 an ounce “maybe as early as the second quarter.” By 2030, he said he believed gold would hit $ 10,000 and silver to $ 300.
Hunter’s perspective in context
While many disagree with Hunter’s prediction for an 80% drop in equities, his views on inflation and speculation about the Fed tightening earlier than expected are now commonplace.
For example, economists at Morgan Stanley explored in a March 3 memo how the Fed might react to higher yields in the future and found that while members of the Federal Open Markets Committee have yet to indicate that ‘they were ready to tighten the policy, they could do so if conditions overheated.
The Fed’s intervention will likely come through communicating and, if necessary, reducing their balance sheets, economists said. Still, they argued, intervention is unlikely and the federal funds rate will remain at current levels until 2023.
But there is always a possibility that a tightening scenario could occur if things get out of hand in the months to come. And if they do, stocks could have a long way to go.
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