Expert Warns That 80% Drop in S&P 500 Awaits

  • David Hunter reiterated his call for a steep decline in stocks.
  • He said he expected the S&P 500 to drop as much as 80% from its peak.
  • Hunter said Fed tapering would trigger the crash.

Investors seem nervous — perhaps rightfully so.

Stocks are up 90% from the lows in the past year and a half, an extraordinary bull run. Many measures of valuation show historic overextension. The Federal Reserve is getting set to taper asset purchases. Treasury bond yields are expected to rise. The pandemic isn’t quite under control yet. The Chinese real-estate firm Evergrande’s near collapse sent shock waves throughout the global financial system.

The list goes on.

Many of the top strategists on Wall Street have said in recent weeks that some sort of pullback is coming.

Stocks’ performance in recent weeks has reflected this cautious outlook. The S&P 500 is down about 4.5% since its September 2 peak of 4,536. The performance has sparked questions about whether the market has peaked.

But according to David Hunter, the chief macro strategist at Contrarian Macro Advisors, the timidness on Wall Street and among investors right now signals that stocks haven’t yet topped out in this

bull-market
cycle.

“Everybody on Wall Street, and like you say, an awful lot of people on Main Street, are focused on markets at a top or markets past the top or just about to the top,” Hunter said during a September 27 episode of the “Coin Stories Podcast.” “And I think when you get that kind of mentality or that kind of a narrative out there, that’s so popular, you know, you’re probably not there.”

Hunter thinks the S&P 500 will go to 5,000, a level he adjusted upward earlier this year from his initial forecast of 4,500, he said. 

But that will come crashing down when the

Federal Reserve
begins to cut back its balance sheet and taper its asset purchases, Hunter said. And he said he expected the pullback to be big: up to 80% peak to trough.

“We’re going to see more wealth destruction next year, I think — once we get past this last move — than we’ve ever seen,” he said.

As far as timing, Hunter wouldn’t give a specific date. He has said in recent months that he expects the crash to come around the fourth quarter. He also has said that inflation continuing to rise beyond the Fed’s expectations will cause the central bank to taper more aggressively and more quickly than investors have anticipated.

But after the crash, Hunter said fiscal and monetary stimulus efforts would lift stocks back up quickly. 

The Fed is expected to start tapering toward the end of the year, reducing its balance sheet by $15 billion a month from $120 billion a month.

Hunter’s views in context

Hunter’s call for an 80% crash in stocks is on the margins and would be among the largest drops in history. A drawdown that large has happened only once in history, during the Great Depression years. The S&P 500 fell 57% from its peak during the 2008 crisis and 34% during the COVID-19 crash.

But again, most on Wall Street seem to share his bearish sentiment to some degree, and a 15% downturn from recent highs, for example, likely wouldn’t surprise many. 

Plus, stocks are in an unprecedented situation. The Fed’s balance sheet is the largest it’s been since it began quantitative easing in the wake of the global financial crisis, and this, along with its zero-interest-rate policy, has propped up valuations at historically high levels. Taking this liquidity away could very well trigger a downturn.

fed balance sheet



Federalreserve.gov


schiller p/e ratio



Gurufocus.com


At the same time, tapering has been on the minds of investors for months, so it may be priced into stocks to some degree already. Further, the Fed’s willingness to taper signals that it believes the economy is in a healthy enough place to do so, meaning stocks presumably shouldn’t suffer all that much. 

So it’s anyone’s guess how the market will react once the Fed begins to taper. But if Hunter’s prediction turned out to be even half-correct, investors would have done well to keep his warning in mind.