- Guggenheim Partners global CIO Scott Minerd told Insider that shares are likely to fall further.
- Minerd also said the Fed won’t back down on its goal of bringing inflation down anytime soon.
- In a difficult environment, Minerd shared two areas where he thinks investors can find return.
If Scott Minerd were still a trader — someone who buys and sells short-term securities — he says he’d probably like what he’s seeing in the stock market right now.
Indeed, he thinks the S&P 500 could have an edge at around 3,900 in the coming months, thanks to seasonal trends. This would represent a return of around 5%, with the benchmark currently hovering around 3,720.
But as someone with a longer-term investor mindset — Minerd is the global CIO of Guggenheim Partners, overseeing over $285 billion in assets — putting money in the market right now looks a little less appealing.
“As an investor, someone looking for a return over, say, the next 2 to 5 years, there’s no real reason to be motivated to commit capital right now,” Minerd told Insider Wednesday night.
In fact, Minerd sees significant downside risk to stocks for a number of reasons.
One is that the Fed continues on its hawkish course, raising its overnight lending rate by 75 basis points in its fourth consecutive meeting on Wednesday. This will hurt consumer demand, helping to slow the pace of rising prices, the central bank hopes.
The destruction of demand caused by rising interest rates creates another risk that worries Minerd: recession. During a recession, consumers spend less and businesses shed jobs, in turn leading to even lower consumer spending. This hurts earnings, from which stocks derive their value. In a recessionary scenario, which Minerd expects, earnings would contract by around 10%.
Third – and related to earnings – there are stock market valuations. Minerd thinks the S&P 500 is still too overvalued, with a price-earnings ratio of 18.68, according to Oct. 28 data from Birinyi Associates.
“Historically, a recession multiple on equities would be closer to 15x, given the current interest rate situation,” Minerd said. “That would put the S&P at 3,000.” The S&P 500 falling to 3,000 would represent around 19% further decline.
Minerd compared the current environment to that following the dotcom bubble of the early 2000s.
“What we see today is very much like the post-internet bubble period between 2000 and 2003, which was punctuated by a number of rallies and then sell-offs,” he said.
“We are coming out of an extremely high valuation level for equities, just like we did in 2000. In fact, the valuation level was higher at the top this time than it was in 2000,” he continued. “So I wouldn’t be surprised to see the stock market rally enter the first quarter of next year and then start another wave of bear market.”
2 domains that Minerd likes at the moment
Given his bearish outlook on the broader stock market as a source of returns, Minerd shared areas where he thinks investors can find opportunities.
The first is high quality corporate bondswhich currently have yields “at levels we haven’t seen in forever” as investors seek a premium over risk-free Treasury yields, which are high thanks to Fed policy tightening and the ‘inflation.
“It’s a much better place to go with your money than the stock market,” Minerd said.
Minerd said corporate credit yields are not expected to rise much, although some claim they will. One reason he thinks this is because yields on long-term Treasuries don’t climb much higher, even if the Fed raises rates. This can be seen in the inversion of the Treasury yield curve, with 3-month yields climbing higher than those of 10-year bonds.
Another reason is that historically, corporate bonds have only been cheaper than they are now 25% of the time, he said.
Some argue that in the midst of a recession, credit premiums will rise as investors worry about defaults and demand higher yields. But Minerd sees defaults as unlikely and said if premiums rose it would be mainly due to falling Treasury yields as investors pile into safe-haven Treasuries.
Investment grade corporate bonds are those rated BBB by S&P and Fitch and Baa by Moody’s.
The iShares iBoxx $ Investment Grade Corporate Bond (LQD) ETF is a way for investors to gain exposure to investment grade corporate bonds.
Second, Minerd likes defense stocks.
“There is clearly a secular trend to increase defense spending, and it is acyclical,” he said. “If you look at defense stocks year-to-date, they’re generally high. And so I think there’s a lot more upside in defense stocks, both relatively short-term and price-wise. for the next five years.”
Funds like the SPDR S&P Aerospace & Defense ETF (XAR) and the iShares US Aerospace & Defense ETF (ITA) provide diversified exposure to defense stocks.
In addition to highlighting these two areas, Minerd advised investors not to rush into the market.
“I would be patient,” said Minerd. “You know the most expensive sport in the world, don’t you? Bottom fishing.”