Stocks could fall 40% to 50% to reach fair value, with recession in first half of 2019: Morgan Creek Capital

Investors should brace themselves for a significant stock market correction, as well as a recession in the first half of next year, investor Mark Yusko warned on Thursday.

In fact, he says, fair value for equities would be down about 40 percent to 50 percent. However, that doesn't necessarily mean the stock market will have to go to fair value, Yusko said.

"If interest rates keep normalizing, if liquidity keeps falling, if earnings go to where I think they are going to go, which is lower, I think we are going to have a meaningful correction," the founder and chief investment officer at Morgan Creek Capital said on CNBC's "Power Lunch."

Yusko, a noted stock picker who took first place in Portfolios with Purpose's fantasy stock-picking contest in 2016, predicts a recession in the first or second quarter of 2019.

"Things are paying out now just like they did in 2000, 2001, 2002," he said. In the back part of 2000, the stock market went down, 2001 brought a recession, and in 2002 the stock market took a big turn down.

"It's just going to be painful for a while to adjust this overvaluation," Yusko added.

Stocks seesawed in the red in volatile trading on Thursday. The Dow Jones Industrial Average plunged by more than 650 points in afternoon trading, a day after the blue-chip index plunged nearly 832 points, or 3.15 percent. The recent rapid rise in bond yields has been weighing on equities, adding to concerns about the future for Federal Reserve monetary policy. On Thursday, Treasury yields fell from multiyear highs after weaker-than-expected inflation data.

Yusko also questioned whether the economy is really strong.

"We had one good quarter. We've been sub 2 percent [economic growth] for six years," he said.

Plus, forecasts are that gross domestic product is going to be lower than expectations in the third quarter and even lower in the fourth quarter, and there are bad demographics and bad debt, he added.

Jim Paulsen, chief investment strategist at The Leuthold Group, told "Power Lunch" he doesn't see a recession and doesn't necessarily believe this is the start of a bear market.

If things get bad enough, there could even be a chance for one more rally in this bull market, he said.

"We maybe could refresh values, refresh sentiment — that is, gut-check sentiment — and then maybe there's going to be a great opportunity," he added. "I don't know if it's here today, but I think if this keeps up, maybe in the not too much distant future it might be time to get aggressive again for one last run in this bull."

Bitcoin over US stocks

Instead of U.S. stocks, Yusko said he likes bitcoin, which he thinks will outperform equities over the next couple of years.

The cryptocurrency was hit along with the stock market, despite being seen as a "safe haven" asset.

"People do get nervous about liquidity panics, and if you look at the holders of bitcoin there are whole bunch of people who bought in at the wrong time in December," he said. "Those weak hands are folding."

Therefore, he said, it is a great time to buy it.

Correction: Mark Yusko's firm is Morgan Creek Capital.


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