The S&P 500 may be up around 12% since the bloodbath the index saw on Christmas Eve that pushed it briefly into bear market territory, but don’t get too excited just yet – there is likely to be more pain on the horizon.
That’s according to Mark Yusko, the founder and chief investment officer at Morgan Creek Capital, who says that stocks need to drop nearly -50% to reach a fair value.
“We don’t have to get to fair value, but the way math works, for every day you’re above average you’ve gotta spend a day below average,” he said.
Yusko first made the call on October 11 when he predicted that stocks would enter a significant correction, and that investors should brace themselves for a recession beginning in the first half of 2019.
He doubled down this week in an interview with CNBC, and likened the current market conditions to what happened in the early 2000s with the tech bubble.
“Remember the tech bubble popped, there was this return-to-normal rally from late December  through January of 2001, and then it was downhill from there” and stocks didn’t go back up to their previous “crazy valuations,” Yusko said. “And I think we’ve got the same playing out here: the tech bubble 2.0 popped, and we had stocks down 40%, 50%, 60% from their highs and people are saying it’s going to get better.”
He went on to note that companies like Cisco (NASDAQ: CSCO), Intel (NASDAQ: INTC), Microsoft (NASDAQ: MSFT), and Qualcomm (NASDAQ: QCOM), which had sky high valuations during the first bubble, have yet to return to those values. Today, we’ve got companies like Netflix (NASDAQ: NFLX) and Amazon (NASDAQ: AMZN) in the same boat.
For 2019, Yusko sees a “dreadful bear market” where we’ll see many “spiky” rallies throughout the year.
“It’s like a rubber ball bouncing down a set of stairs. Each bounce is higher, that’s just kinetic energy. The end of the trip is a bad place,” he said.
Yusko sees a “double-digit drawdown” for this year, and warns that 2020 will be worse. “The big year is 2020, when the credit bubble starts to blow up.”
“Every company has binged on cheap debt. They’ve over-levered,” he added. “We are going to see a lot of defaults, just like 2002 with Enron and Worldcom. I think it’s going to get ugly.”
Yusko isn’t alone. Billionaire fund manager Jeffrey Gundlach said in December, “I’m pretty sure this is a bear market.”
And Lindsey Bell, an investment strategist at CFRA Research, also said last month that corporate debt is the biggest risk to the stock market, saying, “With over $9 trillion in corporate debt on the balance sheets out there, that’s concerning.”
As for where to turn now, Yusko says, “now is the time to embrace value, just like it was in 2000.” He also likes master limited partnerships, or MLPs, as they have “great cash flows, rising volumes, great yields.”