- Inventories have been declining in recent days amid rising Treasury yields for ten years.
- The 48-year-old vet, David Hunter, says it is temporary and the shares will melt in the second quarter.
- But then overheating will lead to the Fed tightening, says Hunter, causing an 80% drop in equities.
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Stocks are apparently on a fork in the road.
After reaching a new high in mid-February, they have risen against rising interest rates as another stimulus package raises further fears of inflation, and rising vaccination rates give hope for a full economic reopening in the near future.
If the valuations are still exceeded by many measures, should stocks slide further? Or will investors learn to tolerate the rising exchange rate environment? Or should the rates take a breather and pick up the shares higher?
Ask 48-year-old market veteran David Hunter, and he will tell you that this is the third scenario that will unfold in the coming months. Hunter, the chief macro strategist at Contrarian Macro Advisors, told Insider on Wednesday that the stock crash last week was a temporary break in a broader merger that will continue in the coming months.
Hunter said the 10-year treasury notes are currently oversold (yields rise as bond prices fall). And in the few months ahead, he expects their returns to return and fall to 1.15-1.2% from current levels above 1.5%. In the same time frame, he predicts that equities will yield big gains: the S&P 500 will rise to 4,600, the Dow Jones industrial average to 37,000 and the Nasdaq to 17,000.
But that’s when things get worse. Hunter said he thinks inflation will increase sometime in the second quarter as the economy reopens. This will lead to the Fed starting to tighten its policy, with 10-year yields up to 2.5% and 30-year yields up to 3%.
But the sudden series of events in a broader economic backdrop that remains fragile will cause stocks to fall to an 80% drop in the months to come, he said, adding that the Fed’s actions will eventually put the world economy in a deflationary chest. can print. .
“You’re going to see more signs that things are overheating when we open up the economy. It’s ironic because we were in
recession
a year ago, ‘Hunter said, attributing his prediction to fiscal and monetary stimulus efforts.
“If you listen to Jay Powell now, they say ‘Oh, we do not think we should turn up any time this year,'” he continued. go look and say, ‘Wow, inflation is moving much faster than we expected. Wow, the economy is actually showing signs of overheating. And wow, the market is at 4,600 and we have junk effects, and people are piling up. ‘”
Hunter added that “we are in a very unusual situation” because of the possibility of economic overheating ahead due to stimulus, while at the same time the economy is fragile with relatively high unemployment. He said this fragility would make the economy and markets more sensitive to the strengthening of the Fed.
But Hunter said the same thing that would result in the withdrawal – the Fed’s monetary policy moves – would also help offer investors a huge opportunity on the other side of it.
He said the potential decline in equities and the economic push would lead to monetary and fiscal stimulus efforts that are even greater than those of last year. This will push up stock prices, he said, and launch an industry-driven economic recovery.
“The easiest part of my prediction is to predict how the politicians and the central bankers will react,” he said.
Hunter is also positive about gold and silver amid the inflationary environment he expects. He said he thinks gold will rise to $ 2,500 per ounce and silver to $ 45-50 per ounce, perhaps as soon as the second quarter. By 2030, he said he believes gold will reach $ 10,000 and silver up to $ 300.
Hunter’s views in context
While many may not share Hunter’s forecast for an 80% drop in equities, his view of inflation and speculation about the Fed sharpening earlier than expected is now predominant.
Morgan Stanley economists, for example, examine in a March 3 note how the Fed may react to rising returns going forward and find that members of the Federal Open Markets Committee have not yet indicated that they are ready to tighten policy, but that they could do so if conditions overheated.
The Fed’s intervention is likely to take place through communications and, if necessary, reduce their balance sheet, economists said. Yet they have argued that intervention is unlikely, and that the federal fund rate will remain at current levels until 2023.
But there is still the possibility that a sharpening could occur if things get out of hand in the coming months. And if that happens, stocks may fall for a long time to come.