Look for stocks to lose 30% from here, says strategist David Rosenberg

‘There’s nothing right now in my collection of metrics telling me that we’re anywhere close to a bottom.’

David Rosenberg, the former chief North American economist at Merrill Lynch, has been saying for almost a year that the Fed means business and investors should take the U.S. central bank’s effort to fight inflation both seriously and literally. Rosenberg, now president of Toronto-based Rosenberg Research & Associates Inc., expects investors will face more pain in financial markets in the months to come. “The recession’s just starting,” Rosenberg said the market bottoms typically in the sixth or seventh inning of the recession, deep into the Fed easing cycle.” Investors can expect to endure more uncertainty leading up to the time — and it will come — when the Fed first pauses its current run of interest rate hikes and then begins to cut. Investor sentiment is out of line; the household sector is still enormously overweight equities. There is a disconnect between how investors feel about the outlook and how they’re actually positioned. They feel bearish but they’re still positioned bullishly, and that is a classic case of cognitive dissonance. We also have a situation where there is a lot of talk about recession and about how this is the most widely expected recession of all time, and yet the analyst community is still expecting corporate earnings growth to be positive in 2023. In a plain-vanilla recession, earnings go down 20%. We’ve never had a recession where earnings were up at all. The consensus is that we are going to see corporate earnings expand in 2023. So there’s another glaring anomaly. We are being told this is a widely expected recession, and yet it’s not reflected in earnings estimates – at least not yet. There’s nothing right now in my collection of metrics telling me that we’re anywhere close to a bottom. 2022 was the year where the Fed tightened policy aggressively and that showed up in the marketplace in a compression in the price-earnings multiple from roughly 22 to around 17. The story in 2022 was about what the rate hikes did to the market multiple; 2023 will be about what those rate hikes do to corporate earnings.