Here’s what will cause the next stock-market downturn

Rick Newman
Senior Columnist

There’s a good chance stocks will drift upward through 2018, as the Trump tax cuts boost corporate profits. But the ensuing downturn could be sharp, once the bull market ends. “Once we peak, our work shows that we should expect maybe a 40% decline in equities from their peak,” Scott Minerd, chairman of Guggenheim Investments, tells Yahoo Finance in the video above. “I’m talking about a recession, possibly in early 2020. Stocks tend to do well two years before a recession. But in this rally, it’s the opportunity to sell.”

That outlook might sound draconian, but here at the Milken Institute Global Conference in Los Angeles, the world’s top investors are asking how much longer the good times can last. The current bull-market rally began in 2009, making it one of the longest on record. The tax cuts President Trump signed in 2017 could juice markets a bit longer. But some investors gathered at the Milken Conference also feel forces are now swirling that will trigger the next downturn.

The most direct cause of the recession that began in 2007, and the financial crash of 2008, was excessive consumer debt, mostly in the housing sector. Next time, it will be different, Minerd says. “In this downturn, it’s the corporate sector,” Minerd says. “Corporate debt to GDP is at record levels. And when you look at what CEOs are saying, they’re going to use the benefits of the tax cut to repurchase stock, to engage in M&A activity. No one’s really talking about reducing indebtedness.”

The tax cuts, meanwhile, will add to US government debt. And while the Federal Reserve is gradually raising interest rates, they may still not be high enough to allow for aggressive monetary policy by the time a recession hits and the Fed needs to cut interest rates. “We’re in danger of having a collision between monetary policy and fiscal policy,” Minerd says.

If Minerd is right, some of the riskiest investments include high-yield bonds, other fixed-income securities, and eventually stocks. But some investors will undoubtedly hold on, hoping to squeeze out the last gains before the market turns. Keep a parachute handy.

Confidential tip line: rickjnewman@yahoo.com. Click here to get Rick’s stories by email

Read more:

Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman

Follow Yahoo Finance on Facebook, Twitter, Instagram, and LinkedIn