The rally's days are numbered, and a day of 'reckoning' is coming: Rosenberg

  • The stock market is at a critical juncture, and it may be time reduce risk, strategist David Rosenberg says.
  • He predicts economic growth will slow even more as the Federal Reserve resumes its tightening policy.

The stock market is at a critical juncture, and it may be time reduce risk, according to Gluskin Sheff chief economist and strategist David Rosenberg.

The former Merrill Lynch chief economist, who has made the coveted U.S. Institutional Investor All-America All Star Team several times, is out with a warning for investors.

"The reckoning will be which market has the story right: Is it the stock market that is de facto pricing in double-digit earnings growth or is it the Treasury market with the 10-year yield at 2.3 percent?" Rosenberg asked Thursday on CNBC's "Trading Nation." "[The bond market] is really pricing in a completely different nominal GDP growth world."

Rosenberg, who became bullish about six years ago as the U.S. was licking its wounds from the financial crisis, says his money has always been on bonds.

"The bond market is actually reacting to the facts on the ground. The facts on the ground are this: Year-over-year growth on a nominal GDP cycle already peaked at 4.9 percent. We have never before in the post-World War II period ever have seen year over year nominal GDP growth peak below 5 percent. That happened two years ago," he said.

He predicts growth will slow even more as the Federal Reserve resumes its tightening policy.

"[We're] nine years into a cycle where everything is looking late cycle," added Rosenberg.

Yet he acknowledges earnings have been good so far, and President Donald Trump's tax reform package could become a reality — two catalysts that could drive stocks higher.

"Let's make the assumption that this tax proposal goes through. The Fed has already told everybody who's listening that they're raising rates at least another two times this year no matter what," said Rosenberg. "They've already said that if they adjust their GDP forecast based on fiscal stimulus, they will raise rates even more."

Despite being one of the first Wall Street strategists to turn bullish following the financial crisis, Rosenberg has been known as a perma-bear on Wall Street — often getting attacked by his peers for being too negative and this time is no different.

Rosenberg has been telling investors to fade the rally for months.

In mid-September, he warned investors a "perfect storm" correction is coming, and nothing can stop it. He believed a sharp pullback was imminent.

Since then, the S&P 500 and Dow have surged by 12 percent and 16 percent, respectively. And just this week, the Nasdaq broke 6,000 for the first time ever — closing at another record high on Thursday. If the Nasdaq can extend its monthly winning streak to six, it would be its longest stretch in four years.

But it hasn't been all doom and gloom in Rosenberg's forecasts over the past year.

He correctly predicted banks would rally in conjunction with Trump's election win. The S&P financials sector has soared nearly 20 percent since the November results.

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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

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