Stocks go down 78%, investor returns 40%.

• Last year, Kevin Smith of Crescat Capital predicted a major stock market correction.
• This year, Smith’s global macro hedge fund has returned 40% to investors through April 30.
• More pain is expected for stock market investors due to the stagflation environment.

Some of the biggest names in investing believe that more declines are looming for the US stock market this year even though it has already fallen in double digits.

Mike Wilson, head of equities at Morgan Stanley, who has predicted the last three market crashes, warned that shares could drop another 14% by the end of the second quarter.

Renowned economist David Rosenberg said the S&P 500 could fall an additional 17% to 3,300 points.

However, one macro hedge fund boss is making a bolder call.

Kevin Smith, founder and chief investment officer at Crescat Capital, said stock prices could drop another 78% to settle at the low multiples of the last inflationary era on May 29.

In all cases, the market appears to be in a state of delusion today as the average participant continues to buy dips in tech, crypto and fixed-income assets, hoping to return to those manias, while minimizing the risks of continued high inflation that is a valuable resource. scarcity and tangibleness.”

Investors may think Smith is the one fancy this call, but he’s been right so far.

In September, he wrote of his forecast for a 42% correction for the S&P 500 within a year as investors prepare to perfect stocks, while inflation begins to recover. By December, he was warning of an impending sell-off in the S&P 500.

Since the beginning of this year, the S&P 500 is down 13%, while the Nasdaq is down 22%. Smith’s money, on the other hand, is up: his overall hedge fund is back 40% as of April 30th while his long/short hedge fund is back 19%.

How low can stocks go?

Smith’s thesis on further

alcohol market

Focus on the idea of ​​inflation

Recession

.

“The index is down 15% from its all-time high, but is still trading at 187% of GDP,” Smith said in the note. “During similar recessions in the early 1970s and 1980s, the associated bear market did not end until total stock market capitalization fell to an average of 35% of GDP.”

Smith said previous periods of stagflation brought low equity multiples but the Nasdaq 100 is still trading at high valuation multiples.

“If we look at similar bear market systems, there is still a significant downside risk for this big cap tech index,” Smith said.

He added, “Conservatively, if we assume that sales and profits remain flat over the next one or two years during a potential recession, there are further downside risks of between 50% and 69%.” “Sure, the market could pull back at higher valuations, but that’s broadly open risk based on math and history.”

The

Federal Reserve

It is in the process of raising interest rates to curb rising inflation, but Smith believes prices will remain high due to a structural shortage in the supply of basic commodities.

“These industries have long lead times, so it is not possible to increase production without years of increased investment,” Smith said. “As a result, the world is now facing a commodity supply slump and a potential increase in energy and food prices… From our point of view, this will lead to crippling stagflation in the medium term, and this is only the beginning.”

Smith said that higher interest rates may worsen the supply problem because it makes the cost of capital to invest in new commodity production higher.

“There is a much greater risk based on our work that inflation remains elevated and that the Fed will end up having to raise more and for longer than the current rate, as in all previous tightening cycles,” Smith said. “Instead, there is a risk that the stock market correction will continue with the current planned increases and the Fed panic and end its first hiking cycle with real rates remaining in negative territory.”

Prepare to fall

This may sound like a nightmare environment for investors, but Smith still sees “highly appreciated” investment opportunities in the market by exploring commodities and production stocks.

Investment firm GMO, co-founded by legendary investor Jeremy Grantham, recently made a similar call that turned bullish for resource stocks, which they highlighted as trading at very attractive levels.

“Besides energy, base metals, agriculture and forest products, precious metal miners are where some of the deepest value and appreciation potential lies in the market today,” Smith said.

According to the note, Crescat Capital currently has a variety of industries and individual stocks, while for a long time it is positioned in a variety of commodity-related explorers and producers.