The stock market year 2023 has been good so far – too good, says Keith McCullough, CEO of Hedgeeye Risk Management. McCullough warns that the supposed stock bubble is about to burst and identifies three reasons for an imminent crash.
• McCullough anticipates a sharp sell-off in equities
• High inflation and rising interest rates increase downside risk
• McCullough recommends gold and Japanese equities as hedges
Despite all the prophecies of doom, the stock markets are in robust shape overall – despite the most recent setback, the DAX has been up 14.42 percent since the beginning of the year, and the broad US index S&P 500 is even falling by 17.14 percent in the current year slightly higher (as of closing prices on August 29, 2023). Reason enough for some analysts to raise the price target for the S&P 500. For example, Citigroup strategist Scott Chronert and Jefferies analyst Desh Peramunetilleke expect the bull market to continue given a supposedly reduced risk of recession. However, there are also voices that assess the stock market situation completely differently – these include Robert Kiyosaki and Michael Burry as well as Hedgeeye Risk Management CEO Keith McCullough.
That’s why McCullough expects the stock market to plummet
McCullough currently sees a toxic mixture on the market that should soon put an end to the currently prevailing “mother of all bubbles”. There are three factors that, in McCullough’s view, together will cause a stock market crash: rising inflation, very high key interest rates and the ongoing economic downturn.
The US inflation rate has weakened significantly since July 2022, when consumer prices rose by 9.1 percent for the year, and is currently around three percent in the USA. In light of this, some experts have announced that the threat is over. Keith McCullough, CEO of Hedgeye Risk Management, vehemently disagrees: He expects price growth to accelerate again to 3.5 percent and remain high for a while, as he explains in an interview with “MarketWatch”.
Is the Fed turning the interest rate screw again?
McCullough also believes that the forecast that the US Federal Reserve has finally ended the interest rate tightening cycle and will start lowering interest rates again from the beginning of 2024 is a mistake. On the contrary: McCullough expects another one rate hike in September and possibly even another one in November if inflation proves to be persistent. “Further interest rate hikes are a key catalyst for the next stock market downturn. If the Federal Reserve hikes rates while the economy is slowing, it’s going to be a steep downhill,” McCullough said. He even reckons the Fed will deliberately wait for the stock market to collapse before cutting rates again.
McCullough: Crash ahead – this is how investors should react
Such a stock sell-off will happen soon, says McCullough. The combination of strong momentum and positive sentiment towards equities laid the groundwork for a sharp sell-off. The market strategist then suggests some ways investors can avoid the “heart attack risk” of US stocks. “Own what the ‘mother of all bubbles’ investor community doesn’t have,” he advises investors, specifically naming gold and Japanese stocks as two alternatives. In addition, McCullough warns against betting on an economic recovery if conditions are still tight. “Now everyone thinks everything is AI, rainbows and puppies,” is his pithy assessment of the current market situation, alluding to the current AI boom, which some experts like David Wehner have described as a bubble. McCullough also concluded the interview by pointing out that there was a banking crisis just a few months ago that investors had foolishly forgotten.
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