One chief investment officer says he thinks stock markets are nearing a bottom and that a recession is unlikely, but growth will likely be curbed.
Equity markets were mixed during late morning trading Wednesday after closing in the red a day earlier. As of around 11:30 a.m. EDT the S&P/TSX Composite Index was trading lower, alongside modest gains in the S&P 500 Index, Nasdaq Composite Index and Dow Jones Industrial Average.
“We do think we’re getting close to a bottom. We sort of came down into a normal correction when this all started and then once we surpassed that, that’s when things got ugly,” James Demmert, chief investment officer at Main Street Research, said in an interview with BNN Bloomberg Wednesday.
As many investors are wondering where the market is going, he said stocks are “close to that bottom” on a technical and valuation basis.
“On a technical basis, we sort of hit… some trend lines like the one that goes back to 2020 that’s very market supportive. That’s usually where markets and institutions will come back in. We’ve also reached on a technical basis a high level of bearishness amongst investors, that’s usually what causes a bottom to start to form,” Demmert said.
He noted that valuations have “gotten compressed a lot,” where the average stock is trading at or below about 15 times earnings.
“That’s sort of where you start to see a bottom in markets that is not recessionary,” Demmert said.
He added that he does not see a recession as a likely scenario based mainly on two reasons.
“We think it’s unlikely on a global basis, and the reason for that is twofold. One is tariffs as they stand are going to take a big ax to growth here in the U.S. and across borders. But now that we’re growing at 2.5 per cent growth, we think it’s going to cut off half of that growth,” he said.
“So, we’re going to get close to stall speed, but in our view, not recession, and I think that’s where the market likely stops here. Now of course if we fall into recession, markets could go lower. Our view is this is about where it stops.”
If markets continue to move lower, Demmert said “something is going to break” which could force policy makers to make a change. He said that in the event that companies start to go under, markets could start unraveling, which could cause the U.S. Federal Reserve to step in, either by lowering rates or increasing its balance sheet.
“I know they’ve said they wont; they don’t want to, I think that they will and that’s usually where the bottom is formed in markets,” Demmert said.
If the Fed would not intervene in that scenario, he said the U.S. President Donald Trump administration may have to engage in negotiations.
