The carnage that will take place on Wednesday in the US stock market is probably one aperitif compared to the devastation of the bull menu in the coming months and years, Guggenheim Partners global investment director Scott Minerd told MarketWatch in an interview.
On Wednesday, the prominent CIO said he imagined the possibility of a terrible summer and fall for stock investors, in which the Nasdaq Composite Index COMP,
finally broken down, falling 75% from its November 19, 2021 high (currently down around 28%) and the S&P 500 SPX,
it is down 45% from its January 3, 2022 high (from which it is currently down 18%) as we head into July.
“This is very similar to the collapse of the Internet bubble,” Minerd said, referring to the implosion of technology in 1999 and early 2000.
What drives Minerd’s pessimism? He fears that the Federal Reserve has made it very clear that it aims to continue raising interest rates, despite the possibility that this could lead to fluctuations in equity markets and elsewhere.
“What I’m clear on is” that “there’s no market, and I think we’re all waking up to that fact now,” Minerd said.
The CIO alluded to the so-called Federal Reserve’s so-called sell-off option, which is an abbreviation of the belief that the US central bank will rush to rescue tank markets, an approach that has been denied by former Fed chairmen.
More on bear market fears: Why are stocks falling? Inflationary volatility kills the fragile rebound of the “bear market”.
On Tuesday, Fed Chairman Jerome Powell also appeared to be trying to dissuade investors from the idea that the bank should be trusted to favor investors as monetary policy makers try to combat a large dose of inflation.
“Restoring price stability is an unconditional necessity. It’s something we have to do, “Powell said in an interview Tuesday during the Wall Street Journal’s Future of Everything festival.
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Minerd said he believes the Fed will continue to raise rates “until it sees a clear break with the inflation trend” and that “they are willing to go above a neutral rate,” referring to a level of interest rate that does not stimulate or slow down. the economy.
Earlier this month, the Fed’s rate-setting committee raised the federal funds benchmark rate to a target of 0.75% to 1%. It is expected to raise rates by at least 50 basis points at its June 14-15 meeting, as US inflation stood at an annual rate of 8.3% in April, according to the Department of Labor. , well above the Fed’s 2% target rate.
The Guggenheim executive said a May 13 meeting of former Federal Reserve officials and prominent economists, including John Taylor, John Cochrane and Michael D. Bordo, was organized by the Hoover Institution just after the meeting. May of the Fed, made him take a more bearish attitude. position on equities and the market as a whole.
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He said attendees at the Hoover conference estimated that the Fed would need to raise interest rates by 3.5% to 8% to reach neutral, suggesting that the central bank could have of raising rates until there is something in the economy or in the markets, or both, breaks.
The Fed seems to have “little concern about the continuation of what I think is now a bear market,” Minerd said. If that’s the case, “we’ll probably have a pretty severe sale,” he said. The investor said that a severe fall could pause the central banks, but that any respite from the rises may not come until much damage has been done.
Therefore, as long as sales remain relatively orderly and we do not have a sudden drop, the Fed will continue to raise inflation higher than it will justify unemployment when they arrive. [to a neutral rate]”, explained.
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Some Wall Street professionals, such as Wells Fargo & Co. WFC,
Executive Director Charlie Scharf said it would be difficult to avoid a recession in this context of rising rates, and Minerd agreed.
“When you start aligning all the data,‘ a summer of pain is what we’re heading for, ’” he noted, adding that by October, things may have hit rock bottom.
In a draft research report, reviewed by MarketWatch, Minerd said:
Over time, as the Fed continues to grow, we will find ourselves experiencing the effects of an increasingly restrictive monetary policy. Long before this terminal rate is reached, the Fed will increase its risk of overcoming itself, causing a financial crash and starting a recession.
Minerd said the Fed is heading for an excessive tightening of financial conditions in the same way that employment shows some softness.
In the latest check on Wednesday, the S&P 500, Nasdaq Composite and Dow Jones Industrial Average DJIA,
they were down at least 3%, amid a sell-off.