Stocks will continue rising by about 20% for the next 18 months, after which a recession will hit in 2020.
That’s according to Scott Minerd, the global chief investment officer for mutual fund company Guggenheim Partners.
Minerd made the comments while speaking at the 2018 Milken Global Investment Conference in Los Angeles.
According to Minerd, stocks will surge in the short term before a recession-initiated sell-off sometime in 2020.
“I think stocks will go up another 15 to 20 percent, but ultimately, when the recession arrives — and it will arrive — there’s going to be a very hard sell-off in equities,” Minerd said.
Minerd thinks that recent tax cuts put into effect by the Trump administration is the driving factor in higher stock valuations.
Tax cuts will be a boost to corporate profits, he said.
“Corporate debt to GDP is at record levels. And when you look at what CEOs are saying, they’re going to use the benefits of the tax cut to repurchase stock, to engage in M&A activity. No one’s really talking about reducing indebtedness,” said Minerd.
Another justification Minerd offers for his prediction is his belief that investors will find stocks more attractive in the short term.
Minerd believes that valuations will decline significantly in time, though, due to a higher risk premium.
“Right now, in the penultimate year before a recession, because we think a recession is coming in 2020, that typically is a very good year for equities,” said Minerd.
Minerd added that “the longer the expansion has been, the more likely the sell-off will be hard.”
After this period if stock selling, Minerd recommends that investors brace themselves for a recession to follow.
Minerd believes that there will be a 40% to 45% drop in stock values in either late 2019 or 2020.
He said that it will be during this time that the United States enters a full-blown recession.
America currently is on its second-longest economic expansion in history. The economy has been expanding for 106 months straight.
Still, the U.S. stock market has been under pressure for most of 2018.
Since the start of 2018, the S&P 500 is now barely positive. The broad stock index hit its last high on Jan. 26.
“Recessions occur when the economy reaches constraints. As the economy reaches constraints, prices begin to rise and the Federal Reserve has to raise interest rates.
“And, as I like to say: Every economic expansion does not die of old age; it dies because the Federal Reserve shoots it in the head,” Minerd said.