Doug Ramsey, chief funding officer of The Leuthold Group, on CNBC Wednesday laid out a sequence of worst case situations for shares, together with a “broad and deep revaluation” of the market throughout the subsequent recession.
Ramsey stated he sees a U.S. financial recession within the subsequent two years that would wipe out all of the inventory market positive aspects of Donald Trump’s presidency. The S&P 500, as of Tuesday’s shut, was up 28 p.c since Election Day on Nov. eight, 2016.
Over the following yr, Ramsey believes the S&P 500 might “undercut” final yr’s closing low of two,351 on Christmas Eve, which capped off a unstable yr and a dismal remaining three months of 2018.
“I believe it will be scary over the following couple of months,” Ramsey stated in a “Squawk Field” interview, a day after the S&P 500 surged practically 1.three p.c to 2,744 for its third straight constructive session. The index, nonetheless, remained about 6.eight p.c beneath its all-time closing excessive of two,930 again in September — even with the 16.7 p.c acquire since Dec. 24.
Ramsey, in making his case, reiterated a pair valuation comparisons he made in mid-December. He stated a markdown to the identical price-to-earnings ratio seen on the October 2007 prime would ship the S&P 500 to 2,250, about 18 p.c beneath Tuesday’s shut. The identical comparability however utilizing price-to-sales would despatched the index to 2,050, about 25 p.c decrease.
Traders may wish to contemplate bonds reasonably of shares, Ramsey steered.
Yields on 2-year, 5-year, and 10-year Treasurys are all “beneath ranges they hit on the Christmas-Eve lows” within the inventory market, he stated. “You would be again to having a 1-handle on the yields I simply talked about — 2s, 5s, and 10s. I do not suppose it is a dangerous place to park cash proper now; away from shares and into the intermediate a part of the Treasury curve.” A 1-handle means a quantity beneath 2 p.c.
Many Wall Avenue strategists are cautious after shares touched a bear market — down 20 p.c or extra from their latest highs — on the lowest ranges of 2018. However there’s certainty debate on whether or not the market will re-test these lows.
In reality, Tom Lee, co-founder of Fundstrat World Advisors and former J.P. Morgan chief fairness strategist, advised CNBC final month that he believes the Christmas Eve low might very nicely be a generational backside. “I believe 2,350, for lots of causes, is the low that individuals need to deal with like 2009. I believe what occurred final yr is rather a lot like 2008. And this yr could play out rather a lot like 2009,” he stated on Jan. 31.
For all of 2009, the S&P 500 gained practically 26.5 p.c after hitting a monetary disaster closing low of 676 on March 9 of that yr.