A ‘summer of pain’ for stocks? Nasdaq Composite could drop 75% from peak and S&P 500 retreat 45% from peak, Guggenheim’s Scott Minerd warns

The carnage unfolding in the US stock market is probably a amuse bouche compared to the devastation on the menu for bulls in the coming months and years, Guggenheim Partners global chief investment officer Scott Minerd told MarketWatch in an interview.

The prominent CIO said Wednesday that he foresaw the possibility of a terrible summer and fall for stock market investors, one in which the Nasdaq COMP Composite Index,
+1.15%
eventually falls apart, falling 75% from its November 19, 2021 peak (it’s currently down about 28%) and the S&P 500 SPX,
+0.87%
it falls 45% from its peak on January 3, 2022 (from which it is currently down more than 18%) as we head into July.

“That sounds a lot like the collapse of the internet bubble,” Minerd said, referring to the implosion of tech stocks in 1999 and early 2000.

What is driving Minerd’s pessimism? He fears that the Federal Reserve has made it abundantly clear that it aims to continue raising interest rates, despite the possibility that it could result in a crisis in the stock markets and elsewhere.

“What is clear to me” is that “there is no market selling, and I think we are all waking up to that fact now,” Minerd said.

The CIO was alluding to the Federal Reserve’s so-called put option, which is shorthand for the belief that the US central bank will rush to rescue declining markets, an approach that has been denied by previous presidents. of the Fed

More on bear market fears: Why are stocks falling? Inflation jitters end fragile ‘bear market’ rebound.

On Tuesday, Fed Chairman Jerome Powell also appeared to be trying to disabuse investors of the notion that the bank should be trusted to throw investors a buoy as policymakers try to combat a dose disproportionate 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. “There could be some pain involved,” Powell added.

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Minerd said he believed the Fed would continue to raise rates “until they see a clear break in the inflation trend” and that they “are willing to go above a neutral rate,” referring to a level of interest rates that neither stimulates nor constrains the economy. .

Earlier this month, the Fed’s rate-setting committee raised the benchmark federal funds rate to a target ranging from 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 Labor Department. , well above the Fed’s target rate of 2%.

The Guggenheim executive said a May 13 meeting of former Federal Reserve policymakers and leading economists, including John Taylor, John Cochrane and Michael D. Bordo, organized by the Hoover Institution just after the May the Fed, caused him to take a more dovish stance. stance on equities and the market as a whole.

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He said attendees at that Hoover conference estimated that the Fed would need to take interest rates from 3.5% to 8% to reach neutrality, which suggested to him that the central bank might need to raise rates until something in the economy or the markets, or both, it breaks.

The Fed appears to have “very little concern about the continuation of what I think is now a bear market,” Minerd said. If that’s the case, “we’re probably going to have a pretty severe selloff,” he said. The investor said a severe recession could give central bankers pause, but any reprieve from rallying may not come until much damage has already been done.

So as long as the sell-off stays relatively orderly and we don’t have a flash crash, the Fed will continue to outpace inflation and unemployment will justify it by the time they come. [to a neutral rate],” He explained.

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Some Wall Street professionals, including Wells Fargo & Co. WFC,
+1.43%
Chief Executive Charlie Scharf said a recession will be hard to avoid in such a rate-hike environment, and Minerd agreed.

“When you start lining up all the data, a ‘summer of pain is what we’re headed for,'” he noted, adding that by October, things may have bottomed out.

In a draft research report, reviewed by MarketWatch, Minerd said:

Over time as the Fed continues to move higher, we will find ourselves experiencing the effects of ever tighter monetary policy. Long before it reaches this terminal rate, the Fed will increase the risk of overshooting, causing a financial crash and starting a recession.

Minerd said the Fed is headed for excessive financial tightening just as employment shows some weakness.

Guggenheim Partners

In the latest revision on Thursday, the S&P 500, the Nasdaq Composite and the Dow Jones Industrial Average DJIA,
+0.51%
fell, amid a steady sell-off that threatened to push the S&P into a bear market, joining the Nasdaq.

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