Source: Wall Street News
Author: Zhao Ying
The “massacre” staged in the U.S. stock market last night is just an “appetizer” compared to the bloody storm that will be set off in the next few months.
In an interview with Market Watch on Wednesday, Scott Minerd, chief investment officer at asset management giant Guggenheim, said:
Investors are expected to experience “a horrible summer and fall” heading into the second half of the year, with the Nasdaq Composite tumbling 75% from its Nov. 19 peak (now down about 28%), while the S&P The 500 has plunged 45% from its Jan. 3, 2022 peak (now down 18%).
Minerd pointed out that the market looks a lot like the burst of the dot-com bubble (the tech stock crash of 1999-2000).
Legendary investor and GMO co-founder and chief strategist Jeremy Grantham, who has successfully predicted two market crashes, holds a similar view, saying:
The slump in U.S. stocks is ostensibly similar to the bursting of the dot-com bubble in 2000, and the S&P 500 is expected to continue its decline, or 40% from its peak, to levels not seen since the bear market in March 2020.
At the same time, Grantham pointed out that there are some differences between this decline and 2000. The 2000 bubble was just in the stock market, bonds were doing well, yields were amazing, housing was cheap, and commodities were doing well , 2000 was nothing short of “paradise” compared to today. But now the Russian-Ukrainian conflict has broken out, energy and food prices are soaring, the real estate market is in a mess, and the bond market has recorded its worst performance in years.
He thinks the recession could turn into a 1970s-style slowdown in economic growth and persistently high inflation.
No more ‘Fed put options’
The main source of pessimism on Wall Street is the Fed’s tightening policy, which Minerd noted has made it clear that it aims to keep raising interest rates, even though that could lead to turmoil in U.S. stocks and other markets.
Minerd said:
We are all well aware of the fact that there is no “Fed Put”. (The so-called Fed put option refers to the fact that the Fed will quickly come to the rescue of the stock market when the stock market falls)
Federal Reserve Chairman Jerome Powell also seems to be trying to persuade investors not to hope that the “Federal Reserve will bail out the market”. In an interview with the Wall Street Journal on Tuesday, he said that he will continue to raise interest rates without reducing inflation, and warned that this process will not stop May cause some pain.
Mined said he believes the Fed will keep raising rates “until they see a clear break in the inflation trend,” adding that the Fed is likely to raise rates above neutral.
Earlier this month, the Federal Reserve raised the federal funds rate to a target range between 0.75% and 1%, and said it expected to raise rates by another 50 basis points at the next two meetings, according to the U.S. Labor Department. Inflation was 8.3%, well above the Fed’s 2% target rate.
Curbing inflation may require raising interest rates to 8%
At a recent meeting hosted by the Hoover Institution, several attendees, including former White House chief economist Jason Furman, estimated the Fed would need to move rates to 3.5%-8% to reach neutral.
Previously, former AllianceBernstein chief economist Joseph Carson expressed a similar view – “Policymakers need to raise interest rates above the inflation peak every time to suppress the inflation cycle.” That means the Fed will keep raising rates until the economy or markets change.
Minerd stated:
The Fed appears to have “little concerns about the continuation of the bear market.” If that’s the case, we could be in for a pretty severe sell-off. The economic downturn may give the Fed a pause, but rate hikes are unlikely to slow until serious damage is done.
“As long as the sell-off remains relatively orderly, U.S. stocks don’t suddenly collapse, and the Fed will raise interest rates above inflation,” Minerd added.
Mined agreed that some Wall Street professionals, including Wells Fargo CEO Charlie Scharf, said it would be difficult to avoid a recession amid aggressive rate hikes . He pointed out:
We’re heading into a “painful summer” and by October, the market may bottom out.
At present, the Fed is moving in the direction of excessive tightening, and employment is showing a weak trend. Long-term interest rates could be near their peaks given the “conflict process” between the Fed and a cooling economy.
Editor/Jeffrey
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