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The Dow Is Roaring Back – But One CIO Is Calling for a 50% Crash

Last Updated September 23, 2020 2:00 PM
Josiah Wilmoth
Last Updated September 23, 2020 2:00 PM
  • The Dow bounces back after diving 1,861.82 points – nearly 7% – on Thursday.
  • ING says the U.S. economy is exhibiting “hints” of a V-shaped recovery, though that might not translate into a snapback in GDP.
  • Some on Wall Street remain skeptical, and Guggenheim CIO Scott Minerd believes the stock market could crash another 50%.

The Dow Jones Industrial Average (DJIA) is plowing higher on Friday as the stock market scrambles to recover from yesterday’s vicious crash. The index is up more than 600 points, which translates into gains of around 2.5%.

Wall Street analysts continue to debate what triggered yesterday’s sell-off, which saw the Dow plunge 1,861.82 points, and perhaps more importantly – where it goes next.

dow jones chart, stock market
Thursday’s plunge set the Dow Jones up for a big weekly loss, even if stocks are bouncing back today. | Source: Yahoo Finance 

Bulls allege that investors were just taking profits following a feverish upswing and point to data that suggests the economic recovery at least resembles a V.

But bears warn that the Thursday tidal wave was the canary in the coal mine for U.S. stocks – and that investors should brace for steeper losses ahead.

Dow Bounces as Stocks Rally Back from Vicious Plunge

Today’s move to the upside seemed almost inevitable. Volatility begets more volatility , and big trends in the stock market “don’t move in straight lines.” 

That’s why no one on Wall Street seems particularly shocked that stocks are primed for what would otherwise look like a strong end to the week – if it hadn’t immediately followed a plunge that was three times as large.

dow jones today
The Dow rose more than 600 points today, recovering around 1/3 of its Thursday losses. | Source: Yahoo Finance 

As of 9:35 am ET, the Dow Jones had spiked 670.34 points or 2.67%, lifting the index to 25,798.51.

But even after today’s bounce, the index is still heading for a weekly loss of around 1,300 points.

The S&P 500 rose 2.5% to 3,077.03, while the Nasdaq jumped 2.52% to 9,731.83 to round out Friday’s recovery.

Guggenheim CIO Outlines Why Stocks Could Plummet 50%

dow jones industrial average (DJIA) today
If Scott Minerd is right, the Dow and its peers could careen 50% from their recent highs. | Source: Johannes EISELE / AFP

Analysts don’t agree on why the stock market plummeted so precipitously on Thursday.

Various justifications have been bandied about, ranging from fears of a “second wave” of the pandemic to concerns about the global economy. But neither of those concerns caught investors by surprise – nor did they vanish overnight as stocks prepared to rally.

And just like they can’t agree on what ignited the sell-off, there’s little Wall Street consensus about what it means for a stock market that had virtually erased its pandemic plunge.

Scott Minerd, the CIO at Guggenheim Partners Global, buys into the “second wave” narrative. And that’s why he doesn’t think the stock market has a sunny forecast .

“The recent highs have been a selling opportunity, and I think we’re going to have a tough slog here, especially with the increasing number of… cases that are coming up as a result of the reopening,” he told CNBC.

“If the stocks are trading at 30, maybe 35 times earnings, then yes, it’s a bubble. Those sorts of valuations are really historically extreme and in all likelihood end in tears,” he added.

That’s the bear case, and if Minerd’s right, it will see the Dow and its peers careen 50% off their recent highs.

But the bulls have a different story to tell.

The Bull Case – And What Those V-Shaped ‘Hints’ Mean for the Economy

dow jones today
Bulls say Thursday’s sell-off was profit-taking, and that the Fed has created a floor for equity prices. | Source: MISHELLA/Shutterstock.com

They say that stocks had been rising so far, so fast that consolidation was inevitable. That doesn’t mean the rally is over, just that profit-taking is the natural product of a move that has been so singularly heated.

And while the Federal Reserve may not have said much that caught investors off guard at its policy meeting this week, stock market bulls allege that the central bank’s support for risk assets has created a sort of floor  for equities.

“There’s just too much cash sitting around for this to be a deep correction,” Ken Peng, head of Asia investment strategy at Citi Private Bank, told the Wall Street Journal.

“The Fed and other major central banks have already made it very clear they’re there to buy the bottom basically,” he said.

As far as the economic picture is concerned, ING says the story is somewhat more complicated.

Led by Chief International Economist James Knightley, the investment bank has revised up its near-term outlook in response to positive data that has accompanied the United States’ emergence from lockdown.

Knightley points to housing market strength and an unexpected rebound in auto sales  as “hints” of a V-shaped recovery, and he says last month’s surprise rise in employment  is a bullish indicator too.

economy v-shaped recovery in housing market and auto sales
The housing market and auto sales are making V-shaped recoveries, but is that a leading indicator of GDP? | Source: Think ING 

But ING still isn’t convinced that the recovery will continue this aggressive pace over the longer term. The bank warns that home and auto purchases don’t necessarily reflect broad economic strength.

Noting that the average homebuyer is 47 years old and the typical car buyer is roughly the same age, Knightley explains why the health of these consumers is an outlier given the nature of this particular economic crisis:

[T]hey are older, more affluent with better credit history so better able to take advantage of some of the great deals available relative to a younger person working in hospitality or retail and who has recently lost their job.

He concludes that a V-shaped recovery in these sectors may not translate into a full V-shaped recovery in GDP.

The medium-term risks suggest a full V-shape recovery is unlikely with a return to pre-[pandemic] activity levels many quarters away.

Of course, markets are forward-looking, so in some ways, the actual economic statistics will matter less than how they line up with what investors expect.

So that inevitably raises another question that’s sure to spark unceasing debate among analysts: What is the stock market pricing in?