There’s never a shortage of Chicken Littles present when it comes to market forecasting.
And with so many pundits consistently call for doom and gloom, it becomes difficult to separate those that are hearsay from those that deserve a second look. After all, the majority wind up being built upon false pretenses and questionable analysis.
Vincent Deluard‘s recent bearish prognostications have not been that type. He always shows his work, and makes largely compelling cases for a rocky road ahead in markets.
The latest call from Deluard — the director of global macro strategy at INTL FCStone— involves a 20% US stock sell-off he says could transpire in the next two months.
At the core of his predication are three reasons he sees being responsible for the plunge:
Although the majority of S&P 500 companies beat earnings estimates in Q2, Deluard thinks they’re operating on borrowed time.
“Earnings are expected to shrink by 3.5% next quarter, before an improbable rebound to 3.9% in the fourth quarter,” he said. “Bar a rapid resolution of the China-US trade dispute (which remains unlikely in my opinion), it is hard to see why the year-long decline in U.S. earnings would revert this fall.”
Lowered guidance is something investors aren’t keen on hearing, and if this trend persists, it could spell big trouble in the near future.
Next, the economy.
The US economy has enjoyed 10-plus years of unimpeded economic growth, but has recently started to show signs of weakness.
A slowdown in manufacturing, GDP, and exports have exacerbated fears of a recession on Wall Street, and Deluard doesn’t think the Federal Reserve’s attempts to stop the bleeding will be enough to quell a material downturn.
The propensity of a hard Brexit, bubbling tensions with Iran, and a US presidential race that is guaranteed to heat up in a few months all add fuel to Deluard’s thesis that a large correction is coming in the fall. Nerves in politics translate swiftly into nerves in markets.
In addition, if the US/China trade relationship deteriorates, things could really get out of hand quickly.
The trades to make after the collapse
Although Deluard is calling for a 20% stock sell-off, he doesn’t think it’s all doom and gloom. And after stocks bottom out, there will be big opportunities available to investors.
Let’s get to the actionable part of Deluard’s forecast. Listed below are the four trades he recommends for investors looking to take advantage of post-correction dislocations.
1. Shorting the US dollar / buying reserve metals like gold and silver
Although the prospect of a series of interest-rate cuts took a hit after Fed Chair Jerome Powell spoke publicly on Wednesday, many experts still anticipate further central-bank easing. That doesn’t bode well for the US dollar, as lower rates look less attractive to foreign investment and, in turn, conjure less demand for US-denominated notes.
Deluard supports his thesis for a weaker USD around three individuals in particular:
“Trump, Mnuchin, and Powell usually get what they want, especially if they work together. Being long the U.S. Dollar in 2020 is betting against the three most powerful men in the world,” he said.
Recommendation: If you agree with Deluard’s thinking, an investment in gold or silver could be an effective way to profit from the move, as they tend to appreciate when the greenback falls. A directional short on the dollar would also be an avenue to explore.
2. Shorting Treasurys
“Demand at recent Treasury auctions has fallen to near-record lows across the curve: orders from indirect bidders, which include foreign central banks, were especially low,” Deluard stated.
This notion puts upward pressure on US Treasury yields as investors are willing to pay less for an over-supplied security. Remember, yield and price move in opposite directions.
Recommendation: If you agree with this notion, shorting US Treasurys would give you the exact exposure you’re looking for.
3. Going long emerging markets
“Emerging markets could enjoy the tailwinds of monetary easing, easier de- leveraging, and faster growth of their domestic markets – an especially important quality in an age of ‘de-globalization,'” Deluard added.
As the US dollar weakens, emerging markets reap the rewards. Since these markets are laden with US dollar-denominated debt, a cheaper USD means lesser repayments.
4. Go long value and cyclical stocks, including inexpensive bank shares
“Rising yields and a steeper curve will hurt long-duration growth stocks and benefit cheap financials stocks,” Deluard said. “The weak US dollar and historically depressed valuations will boost the stocks of materials and commodities producers.”