Scott Minerd is chairman of investments and global chief investment officer of Guggenheim Partners, a management firm with more than $275 billion in assets. Minerd made headlines earlier this year at the Davos World Economic Forum by speaking out against what he perceived to be the excessively bullish attitude of other financial heavyweights, in particular that of Bridgewater’s Co-Chief Investment Officer Bob Prince, who famously said that “the boom and bust cycle is over.”
At the time, I dissected both Minerd’s and Prince’s comments and came to the conclusion that Prince was being overly optimistic. Last week, the vindicated Minerd was interviewed by CNBC. He talked about his perspective on the coronavirus-induced market crash, and what he sees as the pockets of opportunity for investors.
Looking for a bottom
In the run up to the crisis, Guggenheim was invested primarily in conservative assets like U.S. Treasury bonds as well as some very high-quality corporate bonds. Obviously, they did not see the coronavirus coming, but they felt apprehensive enough about the market that they chose to be defensively positioned. However, that seems to be changing. Minerd said:
“Right now, given where the interest rate spread is between U.S. corporate debt and Treasuries is, the bond market has only traded cheaper where it is right now about 10% of the time. This is telling you that we are in the value zone, and we are starting to look at picking up some value securities.”
Minerd went on to say he believes there is still 10% to 15% downside left in the stock market, especially since the economic data from the last few months is only starting to come through. Earnings for this quarter will obviously be very bad, but the question remains to what extent is that already priced into the markets. Minerd points to the fact that, typically, the drawdown in stocks during a recession is around 40% to 50%, so there are still a ways to go from where we currently are - as of writing, the S&P 500 has lost 34% from it's all-time high.
During the 2001-02 recession, for instance, the drawdown from the previous high was 49%. In 1974, it was 48%. And after the financial crisis of 2008, it was 57%. And of course, this crisis could end up being worse than 2008 (but it could also be better).
What Minerd is looking for is "capitulation" - when sellers are willing to take almost any bid, no matter what the price is. Apparently this has been happening in some areas of the bond market, but not so much in stocks. Until that happens, he doesn’t think stocks will have bottomed.
With all that being said, it is impossible to pinpoint exactly when stocks will bottom. When he said that we are entering the "value zone," what he meant was prices are finally approaching attractive levels. It’s very possible that the market will overshoot, but that’s OK. If you have done your homework and know that you are buying at attractive prices, then it should not matter if those prices get even more attractive.
Read more here:
- Ray Dalio: The Federal Reserve Must Act to Mitigate Corporate Losses​
- Morgan Stanley: Markets May Have Fully Priced in a Recession
- Howard Marks: This Is the Essential Investing Subject
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