• David Hunter, the chief macro strategist at Contrarian Macro Advisors, thinks "the second shoe" stemming from the coronavirus fallout is bound to drop sometime after Labor Day.
  • According to Hunter, stocks will rally hard into the summer. However, once investors realize how dire the situation is — businesses failing, bankruptcies, excessive leverage — they'll quickly lose their enthusiasm.
  • Hunter is calling for stocks to carve out fresh all-time highs, and then to remain depressed throughout the 2020s and 2030s.
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Despite a 4.8% GDP contraction, 33 million jobless claims, a 14.7% unemployment rate, and much of the US economy still in lockdown, markets have climbed higher. In fact, the S&P 500 is fresh off its biggest monthly increase since 1987, and the Nasdaq is now positive year-to-date.

Clearly, there's a burgeoning disconnect between the stock market and the underlying economy. 

That's why David Hunter — the chief macro strategist at Contrarian Macro Advisors — isn't ready to give the all-clear just yet. To him, a second wave of selling is still to come. And when it does, he says look out below. 

"In the second shoe dropping, in the second stage of the bust, it's when we'll see the true financial carnage come," he said on the "Palisade Radio" podcast. "I think we'll see a lot of involuntary debt liquidation. We'll see a free-falling financial system because banks will be failing around the world."

Hunter's thinking is simple: The market has already digested the initial shock stemming from the coronavirus — the proverbial "first shoe" if you will — but it hasn't yet accounted for what's yet to come. To make matters worse, these events are taking place in the last leg of what he refers to as a super-cycle — defined as an economic cycle that begins and ends in depression.

The way Hunter sees it, with both the Federal Reserve and US Treasury deploying massive amounts of stimulus to quell coronavirus-induced financial panic, markets should quickly rally to new all-time highs. But these unprecedented actions have only bought investors a bit of time. 

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"There's not people out there looking for loans and looking to start businesses, etc," he said. "So that money goes into the residual, which is the capital markets — the bond market and then the stock market. And that's what fuels rallies at times when the economy looks awful."

To Hunter, all of that stimulus will push the S&P 500 up and perhaps even past 4,000 by Labor Day. But that's only delaying the inevitable. He says when investor eagerness and exuberance runs out, and sentiment takes a turn for the worse, things will get ugly.

"The second shoe dropping will be the deeper part of the bust," he said. "You can engineer a recovery — or at least a semblance of a recovery —  and provide liquidity and keep things going for a while, but there's been a lot of, what I would call, a lot of permanent damage done because of the unprecedented way this virus has taken us down."

In Hunter's mind, loads of businesses lack the inherent staying power necessary to survive this downturn, which will result in slews of bankruptcies and doors closing for good — permanent damange. But he doesn't think the market has come to this realization yet.

What's more, Hunter says that the amount of leverage in the financial system is unsustainable — and it's only going to get worse from here with a stagnant economy and flailing Main Street businesses.

"I knew that when we had the next downturn, that leverage would turn into something that would make 2008-09 look not mild, but certainly much less," he said. "In that second stage, I expect the stock market to roll over and head into a bear market that will be the biggest bear market since the 1929 crash."

With all of that in mind, Hunter doesn't think the market will carve out new highs for decades after it reaches his forecasted top in the summer.

"I don't think we'll — in the stock market — get back to this summer's highs again for decades," he said. "So not only 2020s but probably 2030s as well."

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