- Stubborn inflation, sluggish growth, and further rate hikes may tank stocks, one strategist says.
- Hedgeye's Keith McCullough says strong momentum and positive sentiment may pave the way for a crash.
A triple-whammy of resurgent inflation, depressed growth, and further hikes to interest rates could tank the US stock market, one strategist says.
Inflation has plunged from over 9% last summer to about 3% in recent months, but it still remains above the Federal Reserve's 2% target. Some experts have declared the threat is over, but Hedgeye Risk Management CEO Keith McCullough expects price growth to accelerate to 3.5% and remain elevated for a while, he told MarketWatch in a recent interview.
The Fed has hiked interest rates from almost zero to over 5% since last spring in a bid to curb the pace of price increases. Higher rates encourage saving over spending and increase borrowing costs, meaning they can sap demand, pull down asset prices, and even drag an economy into recession.
While some investors expect the central bank to reverse its hikes soon, McCullough predicts a rate increase in September, and potentially another in November as inflation proves stubborn.
"This is a major catalyst for the next leg down in the equity market," he said. "When the Fed tightens into a slowdown, things blow up."
"I don't think the Fed cuts interest rates until the stock market crashes," he added, noting that a combination of strong momentum and positive sentiment toward stocks has laid the groundwork for a severe sell-off.
The market strategist suggested a few ways for investors to avoid the "heart-attack risk" of holding US stocks.
"Own what the 'Mother of All Bubbles' crowd doesn't," he told MarketWatch, highlighting gold and Japanese stocks as two alternatives.
Moreover, McCullough cautioned against staking money on an economic rebound when conditions are still fraught.
"Now everyone thinks everything is AI and rainbows and puppy dogs," he said, pointing out there was a banking crisis only a few months ago.