Bull Market Could End by 2019, Says Guggenheim’s Minerd

In a recent interview with Barron’s, Guggenheim managing partner Scott Minerd said he sees upside for U.S. stocks before a recession hits in late 2019 or 2020 that will “derail this mighty market and prove painful for bonds.” He is bullish on international stocks and active management, particularly in fixed income.

Here are some highlights from the interview:

  • Valuation is “poor timing tool” says Minerd. “Looking at corporate credit and high yield, valuations are rich. But equities are fairly- priced, based on current earnings, the economy gaining momentum and the tax cut.”
  • Markets don’t die from old age, Minerd argues. “They typically get shot in the head by the central bank, or by an exogenous event.”
  • Minerd characterizes today’s investor as “complacent,” adding that greed had surpassed any fear of a geopolitical event (such as a North Korean missile launch).
  • On the Fed: As economic growth and labor market tightening continue, Minerd says the central bank “feels that it needs to buy an insurance policy against the ultimate rate reduction it will have to do in the next downturn. Given the [flattening] shape of the yield curve, it is also concerned about being too restrictive.”
  • The most “powerful” aspect of the new tax law, he explains, is the accelerated expensing of capital spending, which he says will add a half percentage point to GDP growth, “raising our view to 2.5%. That probably weighs in favor of putting more pressure on the Fed to keep raising rates.”
  • Minerd says his firm uses the following indicators that point to a recession arriving in late 2019 or 2020:
    • Tight labor market
    • Fed raising rates into “restrictive territory”
    • Flattening yield curve
  • “We like Europe because of the solid growth,” says Minerd.
  • Active fund managers can add value, says Minerd, by being able to rotate sector weightings. “Passive funds follow an index, so when valuations become rich in one sector they don’t have the option to underweight and move to another sector.”