Chris Stanton, chief investment officer at Sunrise Capital, says a stock market correction is overdue and predicts a drop of 18% to 20% in the S&P 500 by the end of the first quarter.
Speaking on the Contrarian Investor Podcast, Stanton points to pockets of risk that are seemingly being ignored by the market: The geopolitical situation is far from resolved, volatility is mispriced, and nobody knows what’s going on in repo markets. “Rest assured, we’re heading for a correction and I would argue it’s going to be terrifying when it comes,” he says.
What probably has Stanton most concerned at present is the repo market. “I don’t like that move,” he says. “That is all wrong.” The repo purchases by the Federal Reserve are masking a lack of demand for bonds. The last 40 years have seen a rally in almost all fixed-income securities. There are indications that is changing and it could roll through to all parts of the fixed-income market.
Geopolitically, tensions between the U.S. and Iran could very easily resurface. While Iran historically has attacked through proxies, “this is the first time Iran has ever fired against U.S. assets and owned it.” This marks a major turning point and it’s naive for the market to assume there will not be any more escalations.
The “Phase 1” deal with China, signed today, is a temporary measure that will likely be revoked if Donald Trump wins reelection in November, according to Stanton. “I bet you he scraps any deal the day he’s reelected” and by December the U.S. and China will be locked in a “full on, no end, no holds barred trade war.” If Trump is reelected, his true colors as a trade hawk will be revealed. In such circumstance, “he’s not playing for another reelection and then we find out how hawkish he really is on China.”
A “volatility-led sell off” is likely to be the immediate catalyst for a sell off, and that before the end of the first quarter. “If volatility becomes undone again, it will drive in a disproportionate manner, the equity markets lower. Materially lower,” Stanton says. “By March 31, we’re down 18 to 20%.”
Of course, it may not even take an actual headline for investors to decide equities are overbought. “It could be as simple as a risk parity model in a really big portfolio firing to lighten equities because now equities have become too overbought.” There may be a floor in volatility that causes portfolio managers to rebalance.
Whatever the cause, Stanton is convinced a correction is overdue. “It’s coming,” he says. There are many ways that fear can materialize. “You never hear the bullet that kills you. Whatever it is, we’re probably not talking about it.”
Stanton joined San Diego-based Sunrise Capital in 2011. The firm was founded in 1980 by Rick Slaughter, according to the firm’s website.