- Last year, Kevin Smith of Crescat Capital predicted a major correction in the stock market.
- This year, through April 30, Smith’s global macro hedge fund returned 40 percent to investors.
- He expects more pain for stock market investors due to the stagflationary environment.
Some of the biggest names in the investment world believe U.S. stocks will fall further this year, even as they have tumbled by double digits.
Morgan Stanley’s head of equities Mike Wilson has predicted the last three market crashes, he warns Stocks could drop another 14% by the end of the second quarter.
Famed economist David Rosenberg said the S&P 500 Likely to drop another 17% to 3,300 points.
However, one macro hedge fund chief is making a bolder decision.
“In all cases, the market today seems to be in a delusional state, with ordinary players still buying overvalued tech, crypto and fixed income assets in hopes of returning to these manias, while underestimating the risk of persistently high inflation in precious, scarce, tangible resources,” Smith said in the report.
Investors might think Smith is a delusional person on the call, but so far he’s been right.
In September, he wrote his S&P 500 retreats 42% With investors perfectly positioned for the stock market and inflation starts to pick up, it will come into play within a year.By December, he Warning of an imminent sell-off in the S&P 500.
Since the start of the year, the S&P 500 is down 13%, while the Nasdaq is down 22%.On the other hand, Smith’s money has exploded: his Macro hedge fund returns 40% as of April 30 And his long/short hedge fund returned 19%.
How far can stocks fall?
Smith’s further dissertation
Centered on the concept of inflation
“The index is down 15% from its all-time high, but still accounts for 187% of GDP,” Smith said in the report. “During comparable stagflation in the early 1970s and 1980s, the associated bear market in equities did not end until total equity market capitalization fell to 35% of average GDP.”
Smith said the previous era of stagflation brought lower stock multiples, but the Nasdaq 100 still trades at higher valuation multiples.
“If we look at a similar bear market mechanism, there’s still a lot of downside risk to this big tech index,” Smith said.
“Conservatively, if we assume flat sales and earnings over the next one to two years during a possible recession, there’s a 50% to 69% downside risk,” he added. “Of course, the market could bottom at higher valuations, but that’s an eye-opening risk based on math and history.”
Rates are being raised to curb soaring inflation, but Smith believes prices will remain high due to shortages in structural goods.
“These industries have long lead times, so production cannot be ramped up without adding years of investment,” Smith said. “As a result, the world is now facing a commodity supply cliff, and energy and food prices may go up parabolically … We believe this will lead to severe stagflation in the medium term, and this is just the beginning.”
Rising interest rates could even make supply problems worse because it makes it more expensive to invest in the production of new goods, Smith said.
“Based on our work, there is a greater risk that inflation will remain high and the Fed will eventually have to hike rates more and for longer, as it has with all past tightening cycles,” Smith said. “Also, with the existing planned rate hikes, the stock market is likely to continue to adjust, the Fed panics and ends its rate hike cycle for the first time, and real rates remain in negative territory.”
It sounds like a nightmarish environment for investors, but Smith still sees “high appreciation” investment opportunities in the commodity exploration and production stock market.
GMO, the investment firm co-founded by legendary investor Jeremy Grantham, recently made a similar call in favor of resources stocks, emphasizing that they trade at very attractive level.
“As with energy, base metals, agriculture and forest products, precious metal miners are where the most value and appreciation potential is in today’s market,” Smith said.
According to the report, Crescat Capital is currently short across a variety of sectors and stocks, while long multiple commodity-related explorers and producers.