'By March 31 we're down 18, 20%': A CIO overseeing $189 million says the next market correction will be 'terrifying' - and shares the 3 catalysts that will jumpstart the unwind
- Chris Stanton - chief investment officer at Sunrise Capital, where he oversees $189 million - thinks investors will have to soon pay the piper for months of market tranquility.
- He blames "very generous" Fed policy for the market's lack of volatility, and says that - statistically speaking - "we have to back-end that."
- Stanton cites three potential catalysts for the pending unwind, but thinks anything that forces investor confidence to recede will suffice.
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With stocks churning near record highs, the Federal Reserve maintaining a dovish stance, hiccups in the repo market, and valuations on the higher side of the historical average, it's no wonder that some are starting to become leery of what the future holds.
"We are creating super-inflation in risk assets," said Chris Stanton, chief investment officer at Sunrise Capital, on "The Contrarian Investor Podcast." "It always ends horribly."
He continued: "What's happening now is you've removed - I think in the market's view - all of the systemic risk it can think of."
At the center of Stanton's argument is the "very generous" Federal Reserve. And he says that lessened volatility via low interest rates is responsible for swelling asset prices.
"So these two things come together to create this environment where you see this incredible asymmetry in the market," he said. "And now we're building - what I see as - the dreaded asymmetric movement. I hate this movement."
The asymmetric movement that Stanton mentions above is in reference to the S&P 500 index's staggering performance as of late. Prior to this Monday, the last time the S&P 500 experienced a 1% pullback was early October.
To Stanton, this notion is cause for concern - and when volatility picks back up again, things are going to get ugly in a hurry.
"Statistically, we have to back end that," he said. "So it means we're going to go through one of these periods where at some point everyday is down."
He added: "Rest assured, we're heading for a correction - and I would argue, it's going to be terrifying when it comes because now we have to undo a lot of this."
Catalysts for the unwind
Against that backdrop, Stanton sees a few potential catalysts to kickstart the selling.
"It's anything that causes the investors to lose confidence in the market," he said. "It's going to be something that catches us kind of off guard I think."
1. Iran
"That's the first time Iran has ever fired its ordinance on US assets and owned it," he said. "To say that that's not a turning point is probably pretty naive."
Stanton says that an Iranian cyber attack on the New York Stock Exchange could be a "weird, armageddon scenario" and that's it's not totally unimaginable. What's more, he says that if tensions continue to escalate, we could start to see other major countries getting sucked into the squabble.
"You don't want Russia squaring off against us across that border," he said.
2. China trade deal
"It's nothing," he said. "I bet you he scraps any deal the day he's reelected. I will bet you by December 2020 we are in a full-blown, no ends, no half-holds barred trade war with China. You heard it here first."
To Stanton, the US sees China as an economic threat - and that the latest phase one deal was just to appease markets until after the election. He thinks the real goal (after the election) is to dismantle China's economy.
"If the democrats can't put up a reasonable candidate to beat him - and he goes back in and wins - I think immediately thereafter you better have your trade war helmet back on."
3. The repo market
"I don't like that repo market move," he said. ""Still the most probable crack comes out of fixed income."
He continued: "There's zero chance that the equity market stands up to a massive debt selloff."
Stanton notes a recent interaction he had with a partner at a major private equity firm. He says the partner lamented about an increasing number of difficulties he had selling the debt portion of a deal.
That lack of appetite for debt doesn't sit well with Stanton.
"This is interesting to me because it's the first time you're hearing about bond weakness," he said.
Stanton also notes that billionaire investor Stanley Druckenmiller is also worried about hiccups in fixed income.
"He's short the 10-year and the 30-year," he said in regards to Druckenmiller's holdings. "He's timidly long equities, but he's short bonds now - and that's really interesting to me."
With all of that under consideration, Stanton relays a stark prognostication.
"But what I think causes the next correction - and I think it's going to be much scarier than folks realize - is going to be a volatility-led selloff," he said. "And I think it happens in the first quarter."
"By March 31st, we're down 18, 20 percent," he concluded.