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Business Insider: The Market is 'Still in a State of Delusion,' Says a Hedge Fund Chief, Stocks Have the Potential to Fall Another 78%

May 31, 2022
Market Crash

Article by Kari McMahon in Business Insider

Some of the biggest names in investing think further declines are on the horizon for the US stock market this year despite it already plummeting by double digits.

Morgan Stanley's equity chief Mike Wilson, who predicted the last three market crashes, warned that stocks could fall another 14% by the end of the second quarter.

The famed economist David Rosenberg said the S&P 500 could fall an additional 17% to 3,300 points.

One macro hedge fund chief is making a bolder call, however.

Kevin Smith, the founder and chief investment officer of Crescat Capital, said stock prices could potentially fall another 78% to settle at the low multiples of the last stagflationary era in a May 29 note.

"In all cases, the market seems to be in state of delusion today with the average participant still buying the dip in overvalued tech, crypto, and fixed income assets, hoping for a return to those manias, while underestimating the risk of continued high inflation in valuable, scarce, tangible resources," said Smith in the note.

Investors might think Smith is the one who's delusional with this call, but he's been right so far.

In September, he wrote about his expectation for a 42% correction in the S&P 500 to play out within a year as investors positioned for perfection in equities, while inflation started to pick up. By December he was warning of an imminent sell-off in the S&P 500.

Since the start of this year, the S&P 500 has declined by 13%, while the Nasdaq's dropped by 22%.

How far can stocks fall?

Smith's thesis on a further bear market centers on the idea of an inflationary recession.

"The index is off 15% from its all-time highs but still trading at 187% of GDP," said Smith in the note. "During comparable stagflations of the early 1970s and 1980s, the associated equity bear markets did not end until the total stock market capitalization traded down to an average of 35% of GDP."

Previous stagflationary eras brought low stock multiples but the Nasdaq 100 index is still trading at lofty valuation multiples, Smith said.

"If we look at comparable bear market regimes, there is .......

To read this article in Business Insider in its entirety, click here.

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