The Motley Fool

Why 1 Expert Is Calling for a 50% Stock Market Plunge

One stock market expert is suggesting that stocks could fall by as much as 50% when the next recession hits.

David Stockman, who is the former head of President Ronald Reagan’s Office of Management and Budget, has recently gone on record, calling the current market an environment a “daredevil” market and suggesting that prices for most publicly traded securities are “way, way over-priced for reality.”

However, in one sense, bearish, pessimistic sentiments like Stockman’s recent comments are far from being contrarian — not just in recent months, while global markets sold off to start the year, but unusually negative sentiment has mostly persisted throughout the current nine-year bull market, causing some to joke slyly in the past that “this is the most-hated bull market of all time.”

A lot of the negativity, anxiousness, and trepidation more than likely stems from the pain and grief caused by the last recession and financial meltdown, which was the worst setback to the economy and stock markets going all the way back to the Great Depression.

In fact, some market pundits have been calling for “the next crash” going all the way back to 2013. Mind you, that was the same year that the S&P 500 went on to gain close to 25%.

Stockman, who is responsible for the latest headlines, has been wrong in the past as well.

Back in June of 2017, he went on record as stating that the market was “one of the most dangerous market environments we’ve ever been in. It’s the calm before a gigantic, horrendous storm that I don’t think is too far down the road.”

And since then, the S&P 500 has only gone to gain another 14.5%.

But even Stockman will admit that despite his firmly held views, he doesn’t know when the “next crash” will happen.

“When the catalyst finally comes, it’s hard to say,” Stockman said. “No one can ever define what the black swan is because that is why it’s called a black swan.”

Are Trump’s tariffs the next black swan?

Meanwhile, a report from investment bank JPMorgan Chase & Co. (NYSE:JPM) is claiming that President Trump’s recently proposed tariffs, including taxes on Canadian steel and aluminum, may have already destroyed over US$1 trillion of stock market wealth.

Not to mention the potential impact on that proposed auto tariffs could have on companies like Magna International Inc. (TSX:MG)(NYSE:MGA), Linamar Corporation (TSX:LNR), and other manufacturers — and the broader Canadian economy

Trump’s tariffs on steel and aluminum imports from allied trading partners in Canada, the European Union, and Mexico have drawn the ire from economists and politicians who are adamant that the strategy will ultimately blow up in the presidents face.

While the U.S. may be successful in re-negotiating some major trade deals in its favour compared to what has been in place in the past, that approach is likely to draw retaliatory responses from negotiators, which could end up hurting American workers and the economy.

Bottom line

While there has been a certain element of “boy cries wolf” among market cynics in the stock market’s recent run-up, the truth is that markets have been buoyed by historic levels of monetary stimulus for most of the past nine years, and central bankers may not have as many tools to work with to help stave off an economic recession if push ends up coming to shove.

Stay Foolish.

5 Canadian Growth Stocks Under $5

We are giving away a FREE copy of our "5 Small-Cap Canadian Growth Stocks Under $5" report. These are 5 Canadian stocks that we think are screaming buys today.

Get Your Free Report Today

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Jason Phillips has no position in any of the stocks mentioned. Magna is a recommendation of Stock Advisor Canada.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.