Despite a poor year overall, equity markets have rallied recently, with the S&P 500 up 8% over the past month and the NASDAQ up 11% over the same period.
Ted Oakley, founder and managing partner at Oxbow Advisors, said that was temporary and stocks needed to drop further.
“For [stocks] dropping another 20 or 30% wouldn’t be difficult at all, when you look at what earnings will look like over the next couple of quarters,” he said.
He explained that due to the “high cost of capital” and a high level of inventories for 38 years, companies can expect poor results in the third and fourth quarters.
Oakley spoke with David Lin, presenter and producer at Kitco News.
Stock market rally?
With inventory rising, Oakley said the businesses would experience lackluster earnings.
“When you look at orders down, inventory up, that’s going to affect businesses,” he said. “Look at the big companies telling you that business is slowing down, they are laying off workers. The really big tech companies are doing it.
As “the recession really sets in,” Oakley thinks Wall Street will come to its senses and revise its bullish stock outlook.
“Wall Street likes to keep earnings high until you hit the bottom and then they give up,” he explained. “It could be in a year. The thing is, they still have S&P earnings up 10% this year. And we don’t think that can happen from now on.
He added that Wall Street is “paid to sell good news,” not necessarily accurate predictions.
However, Oakley was not entirely pessimistic. He suggested that “somewhere in the next 6-12 months” would present a “great buying opportunity” in stocks as prices fall.
The yield curve, which measures the spread between long-term and short-term Treasury bills, has steepened. Recently, the spread between 10-year and 2-year Treasuries turned negative, suggesting a recession.
For Oakley, this represents an opportunity in bonds.
“We probably hold 5-8% in long-term Treasuries, because we think that with a steepening of the curve, that long-term yield will go down,” he said.
He said Oxbow is also investing “a lot of money right now” in 6-month to 2-year Treasury bills because “those yields are very good business right now.”
Oakley said Oxbow’s bond allocation is “75% to 80%” in short-term bonds. He also rejected investing in corporate bonds, saying “there are so many companies in this group that have issued bad debt, and Wall Street has let them.”
For Oakley’s thoughts on consumer staples and real estate, watch the video above.
Follow David Lin on Twitter: @davidlin_TV (https://twitter.com/davidlin_TV)
Follow Kitco News on Twitter: @KitcoNewsNOW (https://twitter.com/KitcoNewsNOW)
Disclaimer: The opinions expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. This is not a solicitation to trade commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for loss and/or damage resulting from the use of this publication.