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If Recession Hits, Investors Should Prepare for 40% Drop in Stocks, Says Mauldin

Daily Ticker

It's getting ugly on Wall Street. The Dow Jones Industrial Average may be in store for its ninth straight losing session.  The recent selloff and weak economic data have many pundits talking recession and bear market.

If we are indeed headed for a recession, as The Daily Ticker's guest John Mauldin believes, it may be a good time to sell stocks. "If we do roll over into recession, the stock market on average loses about 40%," he tells Henry Blodget in the accompanying video. "That's not where you want to be. You want to have that money to be able to buy at the bottom."

To that end, Mauldin, the president of Millennium Wave Advisors, recommends investors without a stomach for volatility get out of index funds and "remember cash is a position." Mauldin admits he's no market timer, and he says stocks could rise before another bear market takes hold. In fact, Minyanville points out that the few previous times the Dow fell for eight consecutive days, stocks rebounded, usually with a substantial rally. However, the few tepid rallies on record were followed by a major drop.

In any event, Mauldin says "it's time to be conservative." In addition to being in cash, Mauldin likes high-grade corporate bonds, his thought being, "I want people to pay me for the use of my money." And, as he's mentioned several times on the show in the past, he's still bullish on biotech stocks. "I think biotech is going to be a bubble by the end of the decade." But, if you are going to chase this story, Mauldin warns you must do your homework, because buying a biotech ETF will not capture all the potential gains.