How bad? Strategist says up to 25% drop ahead

Published Thu, Jan 7 20162:52 PM EST

The global sell-off in stocks this week may just be the beginning warned Nomura's widely followed strategist Bob Janjuah. "Policy since the GFC [global financial crisis] has resulted in a deeply unstable outcome in the global economy and across markets," Janjuah wrote in a note to clients. The market watcher asserts that "debt-driven asset bubble implosions (such as the GFC) cannot merely be 'fixed' with even more debt and another round of central bank-driven asset bubbles." Already this week, China's Shanghai composite plunged nearly 12 percent while other major indexes like the S & P 500 and Germany's DAX are down more than 4 percent and 7 percent, respectively. With a gloomy outlook on the horizon, here are some of the major predictions from Janjuah. The strategist predicts the S & P 500 will trade down between 20 and 25 percent in the first half of 2016, falling to the 1,500s level before recovering once the "Fed turns." "I am looking for an earnings and jobs recession in the U.S. this year, to become clear sooner rather than later in the year," he wrote. Read More Top investor Martin Sass cashes out of bull market Instead, he believes Japanese equities offer better value for the first half of the year, albeit he suggests hedging that strategy through currencies. "The Fed may hike once or twice more in H1 [first half], but before 2016 is finished I think the Fed will be on hold/hinting at a new round of easing/actually easing," the strategist noted. He forecasts that before the end of the year, the yield on the U.S. 30-year Treasury will be below 2.5 percent while the yield on the 10-year note will trade at around 1.5 to 2 percent. Janjuah believes the U.S. dollar will do "OK" in the first quarter of 2016, but once the market prices in the "Fed's policy error," the greenback will then turn lower. Similar to equities, Janjuah believes commodities will take a hit in the first half of the year. The strategist thinks WTI crude will trade below $30 per barrel. "Until the Fed turns, I remain bearish China, commodities and EM," he stated. The caveat, however, is that once the market prices a potential reversal by the Fed, which he predicts, the value of the U.S. dollar will decline, leading him to reassess his stance on overseas markets. To be sure, Janjuah gives some catalysts that would force him to reconsider his views. Among them: "If we get major fiscal policy action across China, Japan, the U.S. and the euro zone." "The U.S. (and to some extent the global) consumer could surprise me and all of a sudden start levering up to consume at an annualized rate to 4 percent to 5 percent."

Traders work on the floor of the New York Stock Exchange.

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The global sell-off in stocks this week may just be the beginning warned Nomura's widely followed strategist Bob Janjuah.

"Policy since the GFC [global financial crisis] has resulted in a deeply unstable outcome in the global economy and across markets," Janjuah wrote in a note to clients.

The market watcher asserts that "debt-driven asset bubble implosions (such as the GFC) cannot merely be 'fixed' with even more debt and another round of central bank-driven asset bubbles."

Already this week, China's Shanghai composite plunged nearly 12 percent while other major indexes like the and Germany's DAX are down more than 4 percent and 7 percent, respectively.

With a gloomy outlook on the horizon, here are some of the major predictions from Janjuah.