Last week, David Hefty, chief executive of Cornerstone Wealth Management, warned investors of a sudden market “freefall,” sending the Dow below 5,000. But James Hardesty, president, market strategist and chief economist at Hardesty Capital Management said there is still “much strength” in the economy and expects to end the year higher. They returned to CNBC Monday to share their insights.
“The Dow 5,000 piece is very likely—that’s not even the extreme low,” Hefty told CNBC. “It only takes a few hedge funds to get that margin call."
"When they start to sell—and the fact that everyone’s on pins and needles—that’s where the freefall starts to take place, like oil back in 2008," he said.
"When you look at the fact that we have $17 trillion of leverage inside the financial system and when you look at debt around the world, our financial system has more debt than anything else."
Hefty said while the market will rally in the short-term, investors have to decide how much risk to take once the rally forms a top, because "the downside far outweighs the upside potential.”
"We are in the eleventh year" of a secular bear market and still trying to deleverage “the big bubble” that started in 1994, Hefty added.
In the meantime, Hardesty stuck to his more optimistic guns. He said the economy is in a “sharp recovery phase.”
“I think there will be circuit breakers put in very quickly to prevent a repeat of May 6—that was an unusual event,” he said. “But Dow 5,000 is not likely to happen.”
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CNBC Data Pages:
Monday's Dow Gainers (as of this writing):
Procter & Gamble
No immediate information was available for Hardesty or Hefty.