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Troy Gayeski: The bear market is just around the corner. Take profits while you can.

Claude Malouxe
28. 4. 2023
4 min read

The markets are seeing a lot of different views on the current economic situation. But this strategist's opinion intrigues me quite a bit. It was mainly because of how "radical" this opinion is. So let's take a look at it together.

The S&P 500 Index has seen an 8% increase so far in 2023. This year's rise in the S&P 500 Index is fueled by investor hopes that the Federal Reserve will end its interest rate hikes, which would lead to an easing of monetary policy. However, this optimistic outlook for the market is considered exaggerated by many experts, who believe that the fundamental factors behind the stock's rise are not strong enough.

FS Investments' chief market strategist, Troy Gayeski, warns that the market could fall by 22%.

This is a unique opportunity to use this bear market recovery to prematurely reduce the risk of potentially very painful losses over the next six, nine, 12 months. There is no reason to wait. It's not like you're leaving 10% up on the table.

In fact, Gayeski expects stock markets to fall at least another 20%. Gayeski says investors shouldn't wait for further gains and should start selling their stocks now. But what leads him to this radical view?

First, the strongest rallies have always been in bear markets. Usually, these rallies are driven by technical factors. And then there's the narrative that's been put together to justify it: the more recent one was that inflation will slow enough that the Fed won't have to raise rates anymore, and then we'll have a recession, and that will somehow cause the Fed to cut rates quickly. But recessions aren't bad for incomes or earnings? It really makes very little sense.

What's happening in the markets now makes no sense at all, according to Gayeski. In fact, he says, investors are somehow not counting on a possible recession to affect corporate profits. This means that investors do not take the recession scenario sufficiently into account in their expectations.

Troy Gayeski points out that the strongest rallies tend to be in bear markets and are driven by technical factors rather than fundamentals. This means that market growth can only be short-lived and unsustainable. Investors should be cautious and prepare for a possible stock market decline.

These arguments lead Gayesi to suggest that the S&P500 index could fall as low as 3200 points, giving us a current decline of over 20%. According to Gayeski, it is currently better to sell stocks now, and take profits from the market, or possibly eliminate losses by doing so. It's not worth risking a 20% loss for a few % gains. That's Troy Gayersi's opinion.

A similar view, though not as radical, is held by Morgan Stanley investment strategist Mike Wilson. He has been of the opinion since the end of 2022 that this year's earnings estimates are exaggerated and do not take into account the current economic situation. According to Wilson, stock markets will fall by 20% by the end of this year.

How do I see it?

At the moment, I think it looks more positive than last year. We still have a strong job market, the Fed has not raised the target interest rate yet, which could indicate a planned end to interest rate hikes. As for the recession, I think it is still delayed. A lot of investors don't expect it until early next year. I am a little more pessimistic and I dare say that it could start somewhere in the fourth quarter of this year. I would not expect a deep recession, however, but rather only a mild recession, perhaps even a technical recession. Troy Gayeski's scenario therefore strikes me as rather pessimistic, even exaggerated. There will certainly be stock market falls, even if we fall into only a mild recession, but they will not be as big as Gayeski predicts.

WARNING: I am not a financial advisor, and this material does not serve as a financial or investment recommendation. The content of this material is purely informational.


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