Wall Street's biggest bear explains why stocks will tumble 18% by year-end ahead of a recession in 2020 - and breaks down the trades you should be making in response
- Peter Cecchini, global chief market strategist for Cantor Fitzgerald, has been Wall Street's biggest stock bear in 2019, and still expects a steep equity sell-off in the next few months.
- Cecchini's forecast calls for the S&P to fall roughly 18% to 2,500 by early 2020, with a recession likely to arrive in the second half of the year.
- He says manufacturing and consumer sector data both back up his forecast and explains how he's playing defense based on his projections.
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Peter Cecchini, the global chief market strategist for Cantor Fitzgerald, admits he's been waiting a long time for the "other shoe" to drop on the stock market.
But Wall Street's biggest recent bear has no doubt that it's coming. Cecchini predicted that the market's early 2019 rally would be followed by a steep drop. It hasn't happened yet, and the benchmark S&P 500 index is trading at all-time highs Monday.
"When everybody got to 2,800, I got neutral. And then when large cap equities got to 2,900, I got overtly bearish," he told Business Insider in an exclusive interview.
And he hasn't changed his time frame much, predicting that the S&P 500 will fall roughly 18% to 2,500 late this year or early in 2020. All around him, he sees "cracks" in economically-sensitive sectors like transportation - something that's worrying more than a few experts - and notes that any number of manufacturing indicators point to a recession in that part of the economy.
As those cracks widen, he thinks stocks will sink to his target level.
"We think the probability of a recession in the second half of 2020 is relatively high," he said. "Equity markets here in the US should respond sometime in advance of that [by] six to nine months."
The usual response to bad manufacturing results is that most US economic activity comes from consumers and not manufacturers. While measurements like consumer confidence are still high, Cecchini argues that doesn't prove much because consumer typically keep spending until the eve of a downturn.
"There's really not much room for improvement" in critical indicators like unemployment or spending, he says. He adds that consumer spending is being kept afloat now by loose lending standards, and banks are already beginning to get stricter.
"Lending standards are slowly beginning to tighten across the board," he says.
Cecchini says he's most pessimistic about transportation and regional bank stocks, the two sectors that are giving off many of the negative readings he's concerned about. His prediction of a market plunge and economic downturn unsurprisingly leads to a defensive recommendation for stocks.
"Over the next three to six months I'm relatively more constructive on REITs and utilities," he said, singling out commercial real estate trusts as particularly promising.
Investors can get exposure to those sectors through exchange-traded funds such as the Vanguard Real Estate Index Fund ETF and the Utilities Select SPDR Fund ETF.
He adds that investors seeking income will keep buying longer-term Treasurys as rates in Europe and Japan remain ultra-low. While a lot of investors are keeping their fixed income duration short today, Cecchini is going in the other direction and telling them to go far out on the curve, where rates are higher and not facing as much downward pressure.
"Rates in the US are likely to tend towards zero over the intermediate to long run," he said. "Relative to an average allocation model right now, we're definitely going to be much more heavily underweight equities and long, long duration."