- Shares have fallen in the past few days amid rising 10-year Treasury yields.
- 48-year-old veterinarian David Hunter says this is temporary and stocks will melt in the second quarter.
- But overheating will lead to the Fed’s tightening, Hunter said, causing inventories to drop by 80%.
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The shares appear to be at a fork.
After reaching new highs in mid-February, they refused to raise interest rates, as another stimulus package fuels further inflation fears and rising vaccination rates give hope for a full economic reopening in the near future.
With valuations still overestimated by many measures, should stocks fall further? Or will investors learn to tolerate the rising rate environment? Or are rates about to pause, raising inventories?
Ask 48-year-old market veteran David Hunter, and he’ll say it’s the third scenario that will happen in the coming months. Hunter, who is the chief macro strategist at Contrarian Macro Advisors, told Insider on Wednesday that last week’s stock retraction was a temporary pause in a broader meltdown that will continue in the coming months.
Hunter said the 10-year Treasury bills are now outdated (yields rise when bond prices fall). And in the coming months, he expects his earnings to turn around and drop to 1.15-1.2% from current levels above 1.5%. In the same period, he predicts that the shares will see huge 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 this is where things are going to get worse. Hunter said he thinks that sometime in the second quarter, inflation will rise as the economy opens up again. That would cause the Fed to start tightening its policy, sending 10-year yields to 2.5% and 30-year yields to 3%.
But the sudden series of events in a broader economic scenario that remains fragile will cause stocks to plummet to the sound of an 80% drop in the coming months, he said, adding that Fed stocks are at risk of pushing the global economy for a deflationary collapse.
“You will see, as we open the economy, more signs that things are overheating, in fact. It is ironic because we were in
recession
a year ago, “said Hunter, attributing his prediction to fiscal and monetary stimulus efforts.
“At the moment, if you hear Jay Powell, they say, ‘Oh, we don’t think we’re going to have to squeeze this year,'” he continued. “I think this will be brought forward when you get to the middle of the year, because they will be looking and saying, ‘Wow, inflation is going up 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 bonds, people accumulating. ‘”
Hunter added that “we are in a very unusual situation” because of the potential for economic overheating ahead as a result of stimuli while the economy is at the same time fragile with relatively high unemployment. He said this weakness would make the economy and markets more sensitive to the Fed’s tightening.
But Hunter said the same thing that will trigger the withdrawal – the Fed’s monetary policy measures – will also contribute to presenting investors with a huge opportunity on the other side.
He said that the potential drop in inventories and the economic crisis will lead to even greater monetary and fiscal stimulus efforts than last year. This will cause stock prices to skyrocket, he said, and start an industry-driven economic recovery.
“The easiest part of my prediction is to predict how politicians and central bankers will react,” he said.
Hunter is also optimistic about gold and silver amid the inflationary environment he expects. He said he believed gold would rise to $ 2,500 an ounce and silver to $ 45-50 an ounce “perhaps already in the second quarter.” In 2030, he believes that gold will reach $ 10,000 and silver at $ 300.
Hunter’s visions in context
While many may not share Hunter’s prediction of an 80% drop in stocks, his views on inflation and speculation about the Fed’s anticipated tightening are now prevalent.
For example, economists at Morgan Stanley explored in a March 3 note how the Fed can respond to rising yields going forward and found that, although members of the Federal Open Markets Committee have not signaled that they are ready to tighten policy yet, they could do so if the conditions overheat.
The Fed’s intervention is likely to come through communication and, if necessary, reducing its balance sheet, economists said. Still, they argued, intervention is unlikely and the federal funds rate will remain at current levels until 2023.
But there is still the possibility of a tightening scenario if things get out of control in the coming months. And if they do, stocks may have a long way to go.