A 31-year market vet warns stocks face at least 23% downside with inflation still too high, a recession looming, and a narrow group of companies driving the current rally
Manufacturing data, inflation data, market breadth, and high rates are warning signals, he says.The pilots are circling the airport. The landing gear is down. Wind levels have dropped. The weather is pristine. A soft landing is ahead.to its long-term target of 2% while sparing the economy from a recession. The Consumer Price Index hit 3% in June, and unemployment is still near historically lows at 3.7%., and it's going to spoil any attempt at a soft landing.
For example, yields on the 3-month bill, which closely tracks and leads the fed funds rate, are still above 5.4%. The fed funds rate ceiling right now is at 5.25%. Wolfenbarger said this means stocks still have a ways to drop, as they historically don't bottom until after short-term Treasury rates fall.
There's a simple reason why that's the case: artificial intelligence. Just seven of the top stocks in the S&P 500 are driving most of the returns for the index, which is weighted by market cap. All seven tech stocks have seen their share prices skyrocket this year, carried upwards by AI hype.All of this amounts to a bearish outlook for stocks, Wolfenbarger believes. He thinks the S&P 500 will fall to new lows, below October's level of 3,577.
Morgan Stanley CIO Mike Wilson also pointed out in a July 10 note that stock market and economic signals show the economy is unlikely to be starting a new cycle at the moment. Like Wolfenbarger, Wilson highlighted that market breadth is narrow.
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