The Tell: Star money manager says ‘global recession appears’ inevitable and 10-year Treasury rate will go negative, amid coronavirus fueled stock rout
Scott Minerd of Guggenheim Partners says the panic that has gripped the markets lately reflects the impact of coronavirus on assets that were already fragile.
In a research report dated Sunday, Minerd says the market is only now waking up to the effects of the COVID-19 outbreak, which was first identified in Wuhan, China in December and has infected more than 111,000 so far and claimed around 3,900 lives, according to data compiled by Johns Hopkins.
‘Amazingly, the market is finally waking up to the prospects of not just viral contagion but also to financial contagion. The phenomenon of a relatively insignificant event cascading through an unpredictable series of circumstances resulting in a severe outcome has been referred to as the “butterfly effect”’
— Scott Minerd, chief investment officer at Guggenheim Partners
It’s the first time such a mechanism to dull the intensity of a one-day market plunge has been enacted in its current form.
At last check, the S&P 500 was off 6.2% at 2,788, the Dow Jones Industrial Average
was down 1,600 points, or 6.4%, at 24,214, while the Nasdaq Composite Index
was off 499 points, or 5.8%, at 8,073.
The ugly slide for stocks has been at least partly prompted by a plunge in April West Texas Intermediate crude
which was most recently down almost 17% at $34.38 a barrel, notching its lowest levels since 2016, amid a daily slide of about 20%, following Saudi Arabia’s decision over the weekend to cut oil prices after Russia refused to agree to deeper cuts to oil output as a part of a three-year global pact between members of the Organization of the Petroleum Exporting Countries and their allies.
“Russia is attempting to use this critical moment to its own advantage and the collapse of the Russian-OPEC alliance—precipitated by Russia’s goal of killing off the U.S. shale industry—has turned into an all-out price war that is causing chaos in the energy markets,” Minerd wrote in his report.
Minerd said that a global recession appears likely to be “inevitable” as the knock-one effect from lower oil and coronavirus impinges upon corporate cash flows and whacks corporate earnings.
The investor said that the events of the past week come at a vulnerable time for debt markets as well as equity markets, which have been viewed as overvalued by a number of measures.
“We arrive at this moment with the overleveraged corporate sector about to face the prospect that new-issue bond markets may seize up as they did last week, and that even seemingly sound companies will find credit expensive or difficult to obtain,” he wrote.
‘I hate to admit this, but our proprietary models indicate that fair value on the 10-yearTreasury note will reach -50 basis points before year end and the possibility that rates could overshoot to -2%.’
Minerd speculates that Treasurys ultimately will breach levels below 0% for the first time in the not-so-distant future, predicting a 10-year note yielding -0.50 basis points,
“I hate to admit this, but our proprietary models indicate that fair value on the 10-yearTreasury note will reach -50 basis points before year end and the possibility that rates could overshoot to -2 percent,” he wrote.
He offers an unsightly outlook for high-yield bonds and those just above that level, with an estimate that a trillion dollars of high-grade bonds will head to junk, or below investment grade. However, isn’t calling for an increase in defaults.
As for stocks, Minerd says his models show support for the S&P 500 at 2,600 but 2,000 could but be touched in the near-term if the economy, slammed by energy-related debt defaults and a coronavirus-inspired economic slowdown takes hold.
It’s worth noting that the current downturn for stocks is playing out on the anniversary of the longest bull market on record, which turns 11 on Monday—that’s if stocks can avoid falling 20%, which would meet the widely accepted definition for a bear market.