Market Vet Says 25% One-Day Drop Could Happen

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  • Leading fund manager Salem Abraham cannot rule out a scenario where stocks fall 25% in one day.
  • The 34-year-old market veteran witnessed the infamous Black Monday crash in 1987.
  • Both of these risks make him fearful that another sell-off is on the way.

Salem Abraham, a mutual fund manager who is in the top 5% of his category this year while beating the S&P 500 and the Nasdaq Composite, has a series of dire warnings for investors.

However, nothing is more staggering than the 34-year market veteran’s recent assertion that a large


Depression

A stock market crash and economic collapse in style cannot be ruled out.

It’s already been a miserable year for US equities, with the S&P 500 and Nasdaq Composite down 14.9% and 24% respectively to date. But the founder of Abraham Trading Company said those declines paled in comparison to what might follow.

“I see this, and I’m like, ‘This is really nothing,'” Abraham told Insider in an interview. “There is a much worse scenario than this.”

Fear breeds caution – and caution breeds success

Like all investors, Abraham is a product of his past. The former hedge fund manager and futures trader graduated from the University of Notre Dame in December 1987, just two months after Black Monday, which was – and still is – the worst day on record for US stocks.

The 22.6% crash in the Dow Jones Industrial Average forever changed Abraham’s career before it even began. The fear of another one-day annihilation drives the mutual fund manager to carefully manage risk through diversification, even if all seems to be sunny in the markets. This is the effect a giant storm can have.

“You always have to worry about what can happen,” Abraham said. “You’ll study history, and you’ll say to yourself, ‘At some point, it’s not ‘if’ – it’s ‘when’.'”

Although it may seem tedious, Abraham said he has made a habit of looking through the top 50 headlines on any given day. He focuses specifically on the less important stories outside of the top 10, which he says tend not to be fully integrated into the markets.

Abraham’s stock-reading routine paid off in 2020. The longtime investor said he had heard for the first time of a mysterious upper respiratory illness that had killed a few people in China. in December 2019. About a month later, Abraham said he took two hours off his Sunday to read all the stories he could about the disease that would later be known as COVID-19. Then he said he traveled 100 miles to Amarillo, Texas, to buy “about 500” heavy-duty N95 masks for family members and employees. The mutual fund manager also lightened on equities.

Needless to say, these precautionary measures proved to be prescient for the performance of his business.

“It boils down to almost sick paranoia all the time, worrying about things, and you’re always protecting yourself,” Abraham said.

2 reasons why a stock market crash could happen

Any talk of a repeat of a market meltdown like the Dow’s 89% decline in the 1930s or the Nasdaq’s 76% plunge in the early 2000s is bound to be dismissed by bulls as a fear campaign. .

But while there are many clear differences between today’s stock market and those of the past, Abraham thinks ignoring the possibility of another hard selloff is a mistake.

“People have both short memories and a lack of respect for history,” Abraham said.

There are two main reasons Abraham said he was worried about a scary stock market sell-off: Investors are overexposed to equitiesand the


Federal Reserve

possesses depreciated the US dollar.

The longtime futures trader spoke at length to Insider about the benefits of diversification and explained why owning multiple types of stocks doesn’t really diversify. He said it was like making a fruit salad with 20 different varieties of apples and no bananas or grapes.

Many investors have grown weary of bonds in recent years and have instead flocked to substitutes, Abraham noted. Having most, if not all, of your stock portfolio looks brilliant – until it doesn’t. Too much exposure to equities is “dangerous” because it can lead to huge selloffs if fundamentals crash, people start selling en masse and the problem gets worse, Abraham said.

The market’s current weakness is painful, but the founder of Abraham Trading Company said it was “minor” compared to the 27% two-day decline he experienced far back in 1987. But the story shows that there are reasons to believe that this slowdown could quickly become major.

“Before the fall of 27% in the fall of 1987 (October 16 and 19), look, and you’ll see the stock market was going down a bit,” Abraham said. “And it was down, I think, about 10%. I should get back to that, but I know it was drifting lower. And they had talked about weakness.”

Abraham continued, “And so I’m like, ‘We could just be setting up for a 25% drop in one day. “”

The reason Abraham said he thinks stocks could lose a quarter of their value in one day instead of two, as they did in 1987, is because of the ubiquity of e-commerce. Black Monday was made worse by algorithmic selling, but Abraham noted that much of the selling was done by humans, which is a slower process that he called the crash’s “coated candy.”

If this doomsday scenario occurs, it is not just the wealthy who will be crushed. Workers’ pensions and college endowments would evaporate if they relied too heavily on stocks, Abraham said.

“They locked the lifeboats on the Titanic, and the lifeboats are sinking with the Titanic,” Abraham said.

The second potential needle toward a market bubble — and the reason Abraham didn’t fully approve of the bond purchase — is that the fund manager believes the US central bank has debased the dollar by rapidly increasing mass. monetary before and during the pandemic.

To stave off economic catastrophe during the 2020 shutdowns, the Fed rushed to buy billions of dollars in bonds, which inflated the money supply by 41%. Experts now largely agree that this played at least a minor role in pushing inflation to its highest level in 41 years.

“It’s like asking a teenager to put wood in the fireplace and they put in about 16 logs,” Abraham said. “And you walk in and there’s this hell and you can’t – it just has to burn. You can’t go and remove the logs.”

Abraham continued, “You’re like, ‘Hey, mate, you’re gonna burn the house down by putting 16 logs in the fireplace at once.’ And he said, ‘Well, you said, ‘put wood on the fire.’ So don’t tell a teenager to put wood on a fire, and don’t drop a Fed with a printing machine. “

The Fed’s decision to inflate the country’s money supply has turned the United States into “Argentina-lite,” Abraham said, referring to the South American nation’s famous monetary policy problems.

Although the strength of the U.S. dollar since the start of 2021 seems to disprove Abraham’s argument, a Morgan Stanley strategist recently likened the greenback to “the cleanest dirty shirt” in a closet, meaning that it only looks attractive compared to fiat currencies. Abraham said he fears that what he sees as a currency cut by the Fed will completely “ruin” fiat money.

Don’t Panic — Diversify

Abraham’s best advice for investors is to be wary of the risks facing the market while remaining calm, diversifying away from stocks and watching for a significant reversal in the dollar.

“There’s a lot to worry about over the next two months, but you never know when stocks will pick up,” Abraham said. “So I wouldn’t say you should take out inventory. You just need to size your inventory right.”

Abraham added: “Instead of having


meditation

class to calm down on your stocks, but don’t have that many in your wallet.”

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