One of Wall Streets top asset management firms has jumped on the bearish bandwagon, warning the financial community that a downturn is coming. Global asset manager, investment bank, and financial advisory company Guggenheim Partners went on to say that the upcoming recession will likely be milder then past economic downturns.
However, they still anticipate that the stock market will suffer a drastic reversal, predicting major indexes such as the S&P500 declining 40-50 percent as early as 2020.
Overall, the company citing a stronger housing market alongside a well-capitalized banking system as signs of the economy being more resilient then in 2008. However, Guggenheim argued that equity benchmarks would sharply decline due to lofty valuations and an exhaustion of fiscal and monetary policy tools. Analyst Scott Minerd wrote in a research note that level of equity valuations preceding recessions were good indicators of the potential maximum downturn of stock prices.
“Our work shows that when recessions hit, the severity of the downturn has a relatively minor impact on the magnitude of the associated bear market in stocks. Given that valuations reached elevated levels in this cycle, we expect a severe equity bear market of 40–50 percent in the next recession, consistent with our previous analysis that pointed to low expected returns over the next 10 years,” Minerd said according to MarketWatch. “Even with another hike or two in this cycle, per the Fed’s March 2019 Summary of Economic Projections, the Fed would have less than 3 percentage points of rate cuts available to combat the next recession.”
Guggenheim analysts went on to compare the current market situation to that just prior to the dot-com bubble, which saw markets invest generously into technology stocks for the promise of aggressive gains. Some have paralleled this situation with the slew of mega-billion-dollar tech IPO’s hitting the markets this year, such as Lyft, Uber, Palantir, and more. While the macro-economic impact of the dot-com bubble bursting was minimal, stock prices were devasted.
Another major predictor of the global economic situation lies in China’s ability to prop up the world’s economy. However, recent data has seen the country’s key metrics weakening recently. At the same time, public debt levels remain high in the Asian country following a long period of fiscal and monetary stimulus from Beijing.
“When the global economy slows, Chinese policy makers are unlikely to deliver nearly as much stimulus as last time around, even if China manages to avoid a debt crisis or ‘hard landing’ scenario,” Minerd added.
Late March, Scott Minerd spoke again on the topic of the inverted yield curve which traumatized many in the markets. As one of the most accurate predictors of past recessions, the crossing of short-term 3-month yields and long-term 10-year bonds is seen as a “doomsday” sign for many. He ended up postulating that the Fed will end up raising interest rates despite these fears. “The rate declines are starting to feed back into the real economy and ultimately, the economy is going to reaccelerate and that’s going to continue to drive job growth, which will eventually spill into third or fourth quarter [economic growth],” he said. “For that reason, the Fed will find itself raising rates before the end of the year.”
While there still some bullish signs in other markets, the idea that a recession is looming in the next couple of years is becoming wildly accepted on Wall Street.