The world's most accurate economist says a full US recovery is unlikely before 2022 — and warns of a stock-market correction before year-end
Christophe Barraud, chief economist of the broker-dealer Market Securities, has been ranked Bloomberg's most accurate forecaster of US economic data eight years in a row. He told Business Insider that the US won't return to its fourth quarter 2019 real GDP level until at least 2022, and for some European countries, a recovery won't happen until 2023. "It will take a long time for life to return to normal," Barraud told Business Insider. Read more on Business Insider.
The US economy has a long road of recovery ahead from the shock of the coronavirus pandemic, and that could weigh on the stock market's epic rally, according to Christophe Barraud, chief economist of the broker-dealer Market Securities. The pandemic slammed the US economy, putting millions of Americans out of work and leading to a 5% slump in gross domestic product in the first quarter of 2020. And, it's going to get worse — economists estimate that US GDP will slump more than 30% in the second quarter, before returning to growth at the end of the year. A recovery to the pre-pandemic level won't happen overnight, according to Barraud. "It will take a long time for life to return to normal," Barraud told Business Insider. Even if there is a vaccine by the end of the year, it likely wouldn't be distributed until 2021, leaving a long time for the US to grapple with the virus. Because of this, he said that the US won't return to its fourth quarter 2019 real GDP level until at least 2022, and for some European countries, a recovery won't happen until 2023. Barraud has a track record of getting it right. He has been ranked Bloomberg's most accurate forecaster of US economic data eight years in a row. He's also been ranked as a top economist for the euro-area since 2015, and for China since 2017. Read more: GOLDMAN SACHS: Buy these 13 stocks that are poised to crush the market within the next 2 weeks as earnings season gets underway Uncertainty could spark market correction As the US economy recovers, Barraud sees much uncertainty that could lead to a correction — meaning a drop of 10% or more — for stocks from August to November. This would thwart the market's recent momentum — the S&P 500 just posted its best quarter since 1998 and the Dow Jones industrial average had its best quarter since 1987. "Markets are not pricing in a lot of risk," said Barraud, adding that this may be due to dovish fiscal policy, or the potential for another round of stimulus in the short term as countries deal with the virus. He also said that market structure has changed, with some of the rebound in the second quarter driven by heavy buying by retail investors, hedge funds, and commodity trading advisers. But that could change, he said. Market focus could shift in August and start looking more closely at the presidential election, and what that means in terms of fiscal policy, trade policy, and more. That could lead people to take some profits, and market structure might revert back to what it looked like before coronavirus, Barraud said. Read more: Bank of America identifies 3 indicators that could make or break the stock market this summer – and warns they're all deteriorating fast Risks include: 2020 election, earnings, and COVID-19 In addition to the election, he sees the upcoming earnings season and a potential second wave of COVID-19 as events that could pull markets lower. "At this point people look a little optimistic about EPS for next year," said Barraud, adding that analysts and investors are expecting a V-shaped recovery and aren't pricing in the potential risks, such as increased taxes, that could come as a result of the presidential election in November. "The market could react because at this point there is no room for disappointment," he said. In addition, because a coronavirus vaccine isn't likely to be distributed in the US until next year, there is "still some time for a second wave, which would be very damaging," he said. This could raise further uncertainties about the employment situation in the US, as well as stocks going forward, according to Barraud. "My advice would be to be cautious from August, maybe take some protection," Barraud said. Read more: The most accurate tech analyst on Wall Street says these 6 stocks have potential for huge gains as they transform the sectorJoin the conversation about this story » NOW WATCH: Pathologists debunk 13 coronavirus myths
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Summary List Placement Welcome to 10 Things Before the Opening Bell. Sign up here to get...Summary List Placement Welcome to 10 Things Before the Opening Bell. Sign up here to get this email in your inbox every morning. Register here for Business Insider's live election webinar TODAY, featuring three top investing minds Here's what you need to know before markets open. 1. European stocks and oil fell sharply. Progress on US stimulus took a backseat as investors in Europe focused on the impact of tighter lockdown restrictions. See what markets are doing here. 2. Snap soars after smashing profit and user-growth forecasts. The Snapchat owner's stock soared 25% in pre-market trading after the company added over 11 million daily active users in the third-quarter. 3. 'Blue sweep' could boost US recovery and lift euro-area GDP, Goldman Sachs says. Here's why the team forecast that at least $2 trillion of fiscal stimulus, after the presidential inauguration, would have spillover effects for the euro-area. 4. SPAC craze driven by speculation frenzy, Jim Chanos says. History shows "blank-check" companies do not perform well, but a burst of speculation has brought them back into focus, the legendary short-seller said. 5. Three reasons why investors should buy small-cap stocks now. LPL Financial says the streak of underperformance for small-caps is over. Here's why investors should warm up to them. 6. Earnings coming in. Tesla, Verizon, NextEra Energy, Biogen, Chipotle Mexican Grill, and Xilinx are highlights. 7. On the data docket. Federal Reserve Governor Lael Brainard's speech, the Fed's Beige Book, and MBA Mortgage Applications are due. 8. How to trade a K-shaped economic recovery. Strategies plus 2 stock picks from Todd Ahlsten of Parnassus Investments, who's doubled his competitors in 2020. 9. Stock picks for socially conscious investors. Karina Funk, head of sustainable investing at Brown Advisory, highlights 4 companies she thinks are leading on social justice. 10. How to trade a landscape deglobalized by COVID-19. Deutsche Bank outlines the 5 forces favoring smaller companies as this shift occurs.Join the conversation about this story » NOW WATCH: What happens to animals during wildfires
Summary List Placement A Democratic sweep in November would place stocks on a rollercoaster ride through...Summary List Placement A Democratic sweep in November would place stocks on a rollercoaster ride through the end of the year, Morgan Stanley strategists said Friday. US equities are among the few assets poised for a "detour" should a so-called blue wave take place. The market's steady climb would reverse temporarily before correcting in 2021, the analysts said. Stocks would initially dip on fears of higher corporate taxes and uncertainty around future stimulus, according to the bank. Once the party can clarify its fiscal relief plans, a follow-up to March's CARES Act and continued economic recovery can place stocks back on their upward path, the strategists added. Visit the Business Insider homepage for more stories. A "Blue Wave" come Election Day can boost stocks, but only after bouts of strong volatility and a knee-jerk decline, Morgan Stanley strategists said Friday. Current polls suggest Democratic presidential nominee Joe Biden will beat President Donald Trump in November, and that the Democratic Party holds a strong chance of securing control of Congress. Yet US equities are among the few assets poised for a "detour" should such a sweep take place, the bank said in a note to clients. While some assets such as Treasurys and oil would face a steady decline, an overwhelming Democratic victory would form a temporary deviation from stocks' upward trajectory, they added. The market's immediate reaction will likely be negative, according to the firm. Fears of tax hikes will drive initial selling and lower earnings outlooks. Read more: 'The largest financial crisis in history': A 47-year market vet says the COVID-19 crash was merely a 'fake-out sell-off' — and warns of an 80% stock plunge fraught with bank failures and bankruptcies The continued economic recovery would drive some derating of earnings-per-share multiples, posing a short-term risk until profit growth catches up with the updated forecasts. Uncertainty around future stimulus can also cloud initial hopes for fresh relief, the bank said. "We expect fiscal expansion to provide some offset [to higher taxes], but until the market knows the type of fiscal expansion after a Democratic sweep, expect that equity risk premium could remain elevated into January," the team of strategists wrote. Read more: Goldman Sachs says to buy these 21 stocks poised to deliver the strongest sales growth through year-end Still, stocks should resume their climb once volatility dies down and investors get a clearer look at the Biden administration's legislative agenda, according to Morgan Stanley. The continuation of economic recovery will revive spending and drive earnings growth. A follow-up to the March CARES Act will lift bullishness, and Morgan Stanley expects the tax scare to give way to a smaller-than-expected increase. "Our base case is to buy any dip on a blue wave as we think tax policy is difficult to enact and think the legislative focus will lean toward CARES 2 as a top priority," the team said. As for other outcomes, the bank views a divided government as having less of an up-front slump but a longer struggle with passing new stimulus. The nation's economic rebound could stall and slam investors' bullish forecasts, the strategists added. Now read more markets coverage from Markets Insider and Business Insider: Jerome Myers left corporate America to start real-estate investing and amassed a portfolio with over 90 units. He shares the 4-part strategy he's using to chip away at his 1,000-unit goal. Shaquille O'Neal, former Disney executives, and Martin Luther King Jr.'s son target $250 million SPAC launch Xilinx soars 17% on report rival AMD is in talks to buy it for $30 billionJoin the conversation about this story » NOW WATCH: How waste is dealt with on the world's largest cruise ship
Stock investors could be 'delusional' if prices continue to rise faster than earnings forecasts, Ed Yardeni says
Stock valuations are soaring ahead of profit expectations, and investors should "come to their senses" and...Stock valuations are soaring ahead of profit expectations, and investors should "come to their senses" and let prices cool, Ed Yardeni, the president of Yardeni Research, said in a Monday note. The S&P 500's forward price-earnings ratio climbed to 22 on Friday, landing about 3 percentage points above the cyclical peak in mid-February. Stock investors might be "delusional" if prices continue to outpace profit forecasts, Yardeni said. Economic risks sourced from stalled stimulus talks, closed schools, and rising COVID-19 cases serve as additional reasons stock buyers should wait for a more sustainable rally, he added. Visit the Business Insider homepage for more stories. Investors should "come to their senses" and give the stock market some time to slow its roll, Ed Yardeni, the president of Yardeni Research, said Monday. Equity prices are outpacing expectations for near-term profits, forming a price-earnings melt-up many have likened to the dot-com bubble of the late 1990s. The rally grew even more vulnerable through the start of earnings season as analysts' earnings estimates fell. The S&P 500's forward price-earnings ratio climbed to 22 on Friday, about 3 percentage points above the cyclical peak seen in mid-February. The index's forward price-sales ratio recently flashed a similar warning sign. The metric reached a record 2.32 in the week that ended on July 16, handily beating its past two cyclical highs. Investors could be in for a world of hurt if the decoupling of prices from profit forecasts carries on, Yardeni said. "Are stock investors delusional? Not yet, but that could be an apt characterization of stock prices continue to rise faster than forward earnings," he wrote in a note to clients. Read more: 'Castles built on sand': Famed economist David Rosenberg says investors are being too reckless as stocks rally — and warns that a vicious long-term bear market is far from over Various economic risks also threaten the run-up, the strategist said. The US economic recovery could be slowed or even derailed by rising COVID-19 cases or a failure to pass additional economic stimulus on time. Separately, a shift to online classes for schools could create "a serious problem for parents' ability to return to work," Yardeni said, adding that another semester of online classes at colleges would slam nearby small businesses. The looming economic dangers and overextended valuation metrics give investors even more reason to grow cautious of stocks' steady uptick. While the Federal Reserve "continues to keep the wild party going" with its various liquidity-boosting policies, it shields investors from "the harsh reality of the health crisis" and its economic fallout, Yardeni said. "There's certainly mounting evidence that the V-shaped economic recovery during May and June is slowing or even stalling in July," the strategist said. "That could lead to more delinquencies and defaults on loans and bonds." Now read more markets coverage from Markets Insider and Business Insider: US consumer confidence snaps 3-month winning streak as new COVID outbreaks stifle reopening optimism US stocks decline as investors weigh GOP stimulus plan and earnings disappointments A fund manager who's quadrupled investors' money since 2011 says he uses a famed 5-part psychological theory to shape his portfolio. Here are the stocks he bought for each stage.Join the conversation about this story » NOW WATCH: How waste is dealt with on the world's largest cruise ship