Why Stocks Will Plunge 18% by Year-End Despite Fed Rate Cuts

Despite the Federal Reserve's decision Wednesday to cut rates for the third time this year, several prominent market strategists see a big stock market selloff in the near future. Peter Cecchini of Cantor Fitzgerald expects the S&P 500 Index to be at 2,500 by early 2020, a plunge of about 18% by early next year, Business Insider reports. He sees bearish manufacturing and consumer data, making a recession likely by the second half of 2020.

Albert Edwards of Societe Generale notes that stock prices have been advancing faster than earnings, and he finds this to be reminiscent of the dotcom bubble. Meanwhile, interest rate cuts by the Fed appear to be losing their potency, The Wall Street Journal reports. One reason for this loss of potency is that investment in residential housing, a major beneficiary of cuts, has declined as a share of U.S. GDP. In addition, widespread uncertainties about global growth and trade tensions are making corporations hesitant to invest, even if they can borrow at lower rates.

Significance For Investors
"The unfolding profits recession will expose the 'growth' impostors and they will collapse, as they are on the wrong 'growth' PE valuations with the wrong EPS projections," Edwards said, as quoted in another BI article. "Just like in 2001, investors will not wait to distinguish true 'growth' stocks from the impostors. Investors will slam the whole sector and work it out later," he added.

KEY TAKEAWAYS
A recession in 2020 is increasingly likely, as is a selloff in stocks.
Stock prices have been climbing despite weak earnings.
The impact of rate cuts by the Fed on the economy is diminishing.
While Cecchini sees a recession brewing in the manufacturing sector, he is not heartened, as are many other analysts, by consumer spending data and consumer confidence surveys that remain strong. He says that consumers typically keep spending until the onset of an economic downturn. "There's really not much room for improvement" in key indicators such as unemployment or consumer spending, he added....