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As Markets Surge, Jim Bianco Urges Caution: “Expect More Losses to Come”

Aaron Task
Editor in Chief

A week ago the market was gripped with fear and talk of a "retest" of the August lows of 1100 filled the airwaves. Today, markets are surging and the bulls are giddily predicting a run to S&P 1250, 1300 and beyond.

Building on last week's 4.7% gain, the S&P was recently up 2.83% to 1210 while the Dow was higher by 2.26%.

Bucking the rising trend, Jim Bianco of Bianco Research says investors should take a "risk-off attitude."

While most observers (and investors) focus on the equity market, Bianco is focused on the credit markets, which he notes "continue to worsen" and are "not confirming a bottom in stocks."

Clearly, there's not nearly as much stress in credit markets today as in 2008, but Bianco sees similarities between the current environment and the summer of 2008, when the stock market was "attempting rallies" even while the credit market worsened. "Eventually, the stock market gave it up and corrected back to the credit markets," he recalls.

While Bianco is not predicting the kind of "calamity" that befell stocks in 2008 and early 2009, he expects the stock market will soon revisit its August lows, and possibly break below them with risk to S&P 1070. This negative view is buttressed by a forecast the economy will soon slide into another recession, meaning "the $100 per share earnings consensus estimate for the S&P 500 might be 30% to 40% too high."

In sum, Bianco believes investors are better off selling this rally and positioning themselves for another downdraft by sticking with defensive stocks like utilities. "There isn't a safe place [to hide]," he says. "I expect more losses to come. Returns between now and year-end will have a minus sign."

Given that fairly dire outlook, Bianco continues to recommend short-term Treasuries, even at today's miniscule yields. "You're not getting any return but there's no downside risk," he says.