S&P 500 Could Drop 30-50% From Peak in Case of a Recession Says Dan Niles

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S&P 500 Could Drop 30-50% From Peak in Case of a Recession Says Dan Niles
Credit: © Reuters.

By Senad Karaahmetovic

Dan Niles, a founder and portfolio manager for the Satori Fund, believes the S&P 500 could stage a near-term rally although the ultimate lows are yet to be reached.

Niles noted that the S&P 500 staged 5 rallies during the GFC with these types of rallies generally retracing around 70% of the losses of the prior move lower.

“We currently still think the next 5%-10 move in the stock market is higher. CNN’s Fear and Greed Indicator currently has a reading of 11 on a scale of 0-100, which indicates extreme fear with 6 out of 7 of its individual components registering extreme fear,” Niles said in a regular market update.

Despite the belief that the S&P 500 could rally 5-10% from current levels, Niles believes the next 10-15% move in the stock market is lower. He added that the benchmark index could drop 30-50% from peak to through in case of a recession + inflation above 3% in 2023.

“Inflation (CPI) over 5% has preceded a recession every time. It is now over 8%. Oil prices doubling relative to the prior 2 year average ($54 in this case) has preceded a recession every time. Oil at one point breached $120 and is still over $110. 10 of the 13 prior recessions have been preceded by a tightening cycle by the Fed. We believe rates will be closer to 4% before this tightening cycle is over versus just 1% at the high end today. 10 of the last 13 recessions have been preceded by the 10-year yield going below the 2-year yield. This occurred on 4/1/22 and was -7 bps,” Niles added.

Niles urged clients to focus on “capital preservation and steady performance” before an “incredible buying opportunity” will emerge “at some point in 2023.”

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