Scott Minerd of Guggenheim Partners has some good news — and some bad news — for stock-market investors.

Stocks could rally 20% after this bruising rout, says Guggenheim’s Minerd — after that, watch out

Markets

First, the good news: If investors are smarting from a bludgeoning that has racked up withering weekly losses for the Dow Jones Industrial Average

DJIA, -1.19%

, the S&P 500

SPX, -1.73%

and the Nasdaq Composite Index

COMP, -2.06%

, they can look forward to rosier days ahead.

Minerd,
chief investment officer for Guggenheim and one of the world’s
preeminent bond-fund managers, on Friday said that the recent rout has
left the market relatively cheap, compared with its previous lofty
levels, and that has created potential for stocks to surge higher in the
next few weeks and months: “Stocks are cheap based on forward multiples
and should rally by 15%-20% from here unless policy uncertainty around
China and tariffs remains in place,” Minerd tweeted. See Also

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Global equity markets have been
buffeted by worries about flagging corporate revenue; a slowdown in the
second largest economy in the world, China; and a retrenchment in other
economies that many fear could wash up on U.S. shores.

Read: Here are the early signs China’s stock-market woes are starting to infect the rest of the world

And: Former Hong Kong securities regulator gives China investment a ‘wide berth’

Domestically, however, the U.S. has enjoyed strong economic expansion. Indeed, the Commerce Department reported on Friday that the U.S. economy grew 3.5%
in the third quarter, better than the estimated 3.4%. And although
economists may point to some underlying weakness, the GDP figure still
underscores an economy on firm footing.

“I think we’re going
through a classic seasonal adjustment,” Minerd told CNBC during a Friday
interview after his Twitter missive. He said he now thinks the seasonal
trend, with October representing one of the more volatile periods for
stocks, has turned positive, paving the way for a powerful uptrend to
begin.

Minerd believes, he said, that the downturn in the market
that has gripped Wall Street isn’t about rising interest rates, which
equate to higher borrowing costs for corporations and individuals alike.
The Guggenheim CIO said climbing rates, as the Federal Reserve
normalizes monetary policy, “are not yet derailing the bull market” that
has run for about a decade. Minerd estimated that the selloff investors
have suffered reflects a 10-year Treasury note

TMUBMUSD10Y, -1.35%

yielding 5.5%, not the one that
currently sits at 3.08%, around the lowest level for that debt since
Oct. 2.

Minerd’s current views are
particularly noteworthy because he has held to a particularly sobering
market forecast even during the more ebullient moments earlier in the
summer. He’s worried that the U.S. trade battle with China will
intensify into something more menacing for global economies.

In the summer, Minerd warned that investors shouldn’t be lulled into a false sense of security.

Against
that backdrop, the bad news is that Minerd sees stocks falling 40% or
50% after the surge he foresees, as the Fed continues to lift interest
rates until the end of 2019, which is likely to suck the air out of the
market. Minerd predicted a bear market, or a drop of at least 20% from a
recent peak, in the second quarter of 2020.

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