Futures Now

David Stockman: Epic downturn is here, brace for 40% market plunge

David Stockman: A 40% drop will take out bull market
David Stockman: A 40% drop will take out bull market

David Stockman warns a 40 percent stock market plunge is closing in on Wall Street.

Stockman, who served as President Reagan's Office of Management and Budget director, has long warned of a deep downturn that would shake Wall Street's most bullish investors. He believes the early rumblings of that epic downturn are finally here.

It comes as the S&P 500 Index tries to rebound from its worst month since 2011.

"No one has outlawed recessions. We're within a year or two of one," he said Thursday on CNBC's "Futures Now." He added that: "fair value of the S&P going into the next recession is well below 2000, 1500 — way below where we are today."

This is far from the first time he's issued a dire warning. But this time, he suggests the latest leg down is an early tremor of the pain that lies ahead.

"If you're a rational investor, you need only two words in your vocabulary: Trump and sell," said Stockman, in a reference to President Donald Trump. "He's playing with fire at the very top of an aging expansion."

According to Stockman, Trump's efforts to get the Federal Reserve to put the brakes on hiking interest rates from historical lows is misdirected.

"He's attacking the Fed for going too quick when it's been dithering for eight years. The funds rate at 2.13 percent is still below inflation," he said.

Stockman cited the trade war as another major reason why investors should brace for a prolonged sell-off.

"The trade war is not remotely rational," he said. If the dispute worsens, it "is going to hit the whole goods economy with inflation like you've never seen before because China supplies about 30 percent of the goods in the categories we import."

His latest thoughts came as stocks will try to build on last week's rebound. The gained 2.4 percent the week ending Nov. 2. However, the index is still down 6.9 percent over the past month.

"We're going to be in a recession, and we're going to have another market correction which will be pretty brutal," Stockman said.

The White House didn't respond to CNBC for a comment on Stockman's remarks.