McDonald, who is bearish on the market, doesn't think investors are adequately pricing-in the risks associated with the 2020 presidential election, a second-wave in the pandemic outbreak, corporate bankruptcies and the toll high unemployment will ultimately take on consumers.
He's betting on an ultra-volatility ETF as a way to weather the storm he predicts will hit the stock market.
CONWAY GITTENS: It is the end of the third quarter, the best back-to-back quarterly gains since, what, 2019, although September is coming off to be the worst month for stocks since March. Let's get right into it with James McDonald. He is the CEO of Hercules Investments. So James, a lot of optimism in this market today. We've got the Dow up, what, 300, 400 points. But you still think there's more to the correction than we saw the past couple of weeks. Tell me why.
JAMES MCDONALD: Sure. So after every correction-- and when I say every correction, we're talking 83% of them since 1987-- they're followed by downside on the average of 7% over the next 30 days. And those corrections did not account for the crisis, which we are all getting used to, known as COVID-19. The bounce that we are experiencing is temporary. We believe that just a few points away, at 3397 on the SPX, the S&P 500 specifically, we're going to have major selling to the downside.
After every correction, there is a bounce. That bounce is happening now. It's coming to an end. And this is based on data. We now have new information this week to refresh our outlook. Morgan Stanley slashed its Q4 GDP growth expectation from 9.3% down to 3.5. Goldman cut theirs in half, from 6% to 3%. We have GDP data down 31% in the UK-- excuse me, in the US-- down 22% in the UK.
We see it coming. We're on track in 2020 to set a record number of retail bankruptcies, mainstays that we've seen our whole lives-- Neiman Marcus, JCPenney's. Even GNC, the health store, is going out of business. Yesterday, the Dallas Fed mentioned that we don't expect the economy to get back on track until late 2022, or even 2023.
And in the backdrop of all this is the reality, the common sense that, when you shut down an economy, even with federal intervention, $600 a week for some people, it's not going to stabilize or keep the economy up. And so we're definitely expecting a pullback here imminently, and we're positioned to take advantage of it.
CONWAY GITTENS: And so what kind of a pullback are you expecting, in terms of the depth of it?
JAMES MCDONALD: Great. And so we're looking for a midpoint from the bottom in March to the recent high. We think we're going to come off about 12% to 14% initially. We're going to see if there's any good news coming into the market, if there is something that keeps the market elevated to that point. If not, we think we'll fall through, and we'll see March lows. This is all with the presidential election coming up.
We know that our commander in chief is a skilled manipulator of public position-- of public perception. And I don't say manipulation in a nefarious way, but he's skilled at it. He managed to get himself elected against a very strong bench, and he has no intentions of losing this election. So I would expect President Trump to do something between now and the election that sparks this economy and sparks the perception of the upside of the economy, which might give us a little bit of relief temporarily. But we are very confident that the market's going to come back down to its March lows before year-end.
CONWAY GITTENS: Would you put a COVID-19 stimulus package in that list of things that he might try to make happen before the election? And do you think that the market is pricing in too much of an economic stimulus package?
JAMES MCDONALD: Well, that would be outside of the purview of the Oval Office. He certainly could suggest to the lawmakers that they do so, but that's out of his purview. You know, there's a lot of things that can be announced. There could be a trade deal with China. There could be some type of tax plan proffered up should he be elected. Some type of-- and I want to be careful with my words, but some type of bait to get people to get behind him to put him in office again so that this market and this economy that, prior to February, was doing great.
And that is something that-- I don't want to pick on Donald Trump. That's something that all presidents do going into a potential second term, is they do something that makes people want them to come back. And we haven't seen that yet. If you watched the debate last night, we took copious notes. And if you looked out on our notes, there's a lot of question marks. It seemed like banter between two political opponents without much clarity on policy, without much clarity on anything tangible that would move a voter from one side or the other.
And so we're going to expect to see something there. If we do get some type of stimulus package-- it is priced in, to your question-- if we do get some type of Fed announcement where they expect to do something that they haven't already said they were going to do, it may be a temporary relief, but you know, we're at all-time highs in valuations outside of good times. These are definitely recessionary numbers. And we haven't quite found ourselves in a recession, at least in terms of equity market prices.
CONWAY GITTENS: All right, real quick I have two final questions for you, but my time has run out. The first question is, given your prediction that we're going to see a 12% to 14% correction from where we are now, what should investors do, or what are you doing in terms of the fourth quarter? Now, I know you're big on volatility. I'll get to that in a second. But are you doubling down on consumer staples, you know, the sectors that do well in a slowing economy? What's the strategy?
JAMES MCDONALD: Unfortunately, there's nowhere to hide. We're going to see all sectors come down. And clearly, technology is where the upside is in the future. There's going to be a rotation out of tech. And that rotation will likely be into cash. And so if I were to give someone a non-volatility buy recommendation right now, it would be cash.
CONWAY GITTENS: All right, so let me end this with the volatility talk. Last month when we talked, you had this bet, you're going to turn 50 million into a billion dollars on this short-- not short-term, on this ultra volatility index. Tell me how are you doing-- since that time, volatility definitely spiked. So I'm wondering, how's that trade working for you?
JAMES MCDONALD: So first, I should say volatility is dangerous. It's a dangerous thing to play, and individual investors should not. We entered that position at a great time. We saw a 50% bump. We took a profit. We've been incrementally buying. We started buying again today. Volatility can be traded through a short-term futures instrument called [? UVXY. ?] And we'll be dumping hundreds of millions of dollars into [? UVXY ?] over the next couple of weeks.
CONWAY GITTENS: All right, great. That's James McDonald. He's the CEO of Hercules Investment. I'm Conway G. Gittens, and this is Reuters.