Despite the Federal Reserve's decision Wednesday to cut rates for the third time this year, several prominent market strategists see a big stock market selloff in the near future. Peter Cecchini of Cantor Fitzgerald expects the S&P 500 Index to be at 2,500 by early 2020, a plunge of about 18% by early next year, Business Insider reports. He sees bearish manufacturing and consumer data, making a recession likely by the second half of 2020.

Albert Edwards of Societe Generale notes that stock prices have been advancing faster than earnings, and he finds this to be reminiscent of the dotcom bubble. Meanwhile, interest rate cuts by the Fed appear to be losing their potency, The Wall Street Journal reports. One reason for this loss of potency is that investment in residential housing, a major beneficiary of cuts, has declined as a share of U.S. GDP. In addition, widespread uncertainties about global growth and trade tensions are making corporations hesitant to invest, even if they can borrow at lower rates.

Significance For Investors

"The unfolding profits recession will expose the 'growth' impostors and they will collapse, as they are on the wrong 'growth' PE valuations with the wrong EPS projections," Edwards said, as quoted in another BI article. "Just like in 2001, investors will not wait to distinguish true 'growth' stocks from the impostors. Investors will slam the whole sector and work it out later," he added.

Key Takeaways

  • A recession in 2020 is increasingly likely, as is a selloff in stocks.
  • Stock prices have been climbing despite weak earnings.
  • The impact of rate cuts by the Fed on the economy is diminishing.

While Cecchini sees a recession brewing in the manufacturing sector, he is not heartened, as are many other analysts, by consumer spending data and consumer confidence surveys that remain strong. He says that consumers typically keep spending until the onset of an economic downturn. "There's really not much room for improvement" in key indicators such as unemployment or consumer spending, he added.

"Lending standards are slowly beginning to tighten across the board," Cecchini noted, observing that consumer spending has been propped up by loose lending standards. Indeed, a large and increasing number of U.S. consumers are having difficulty paying their bills, including servicing their debt, per a survey by UBS.

Leading investment managers are also becoming increasingly bearish, per the latest release of the Big Money Poll conducted by Barron's. Among respondents, 31% are bearish on stocks, the highest level since the mid-1990s, while only 27% are bullish, less than half the proportion one year ago. Individual investors also polled by Barron's are similarly gloomy, with only 29% calling themselves bullish, and 42% believing that U.S. stocks are overvalued.

Meanwhile, corporate CEOs are registering their lowest levels of confidence since the 2008 financial crisis, and a majority of corporate CFOs expect the U.S. economy to be in recession by the second half of 2020, per two other recent surveys.

John Hussman, an investment manager and former professor, is another prominent bear. "Look, I expect the S&P 500 to lose somewhere between 50-65% over the completion of the current market cycle," he told BI in another report.

While Hussman is derided by some as a "perma-bear" for calling stocks overvalued and headed for a crash during much of the current decade-long bull market, he has had some notably correct bearish calls in the past. He predicted the dotcom crash of 2000 to 2002 and the bear market of 2007 to 2009.

Looking Ahead

Cecchini is most pessimistic about transportation and regional bank stocks. "Over the next three to six months, I'm relatively more constructive on REITs and utilities," particularly REITs that invest in commercial properties, he told BI. "Rates in the US are likely to tend towards zero over the intermediate to long run," he added. Cecchini advises investors in U.S. Treasury bonds to choose longer maturities, where rates are higher and under less downward pressure than short-term rates. He also is considerably more underweight on stocks than most other strategists.