BTIG's Emanuel Says Stocks Risk 1987's 40% Downside Scenario If Senate Doesn't Act

The Federal Reserve's decision Monday to undertake unlimited asset purchases was encouraging, but the Senate's failure to close on a stimulus package shows "politics is getting in the way," Julian Emanuel, BTIG's chief equity and derivatives strategist, said on CNBC's "Trading Nation."

1987 All Over Again?

The simple reality is the longer it takes for the Senate to close a stimulus package, the higher the likelihood of a repeat of 1987, Emanuel said.

The 1987 crash saw stocks lose around 40% from their highs over two months. If this scenario plays out, the S&P 500 index could fall below from Monday's level of 2,237 to below 2,000, he said. 

While a final version of the stimulus package could come on Friday, there is a risk that the wait is too long, Emanuel said. 

"If you delay action long enough, you risk changing the psychology incrementally more," he said.

"And we all know between Monday and Friday, if anything, the news in terms of the virus is likely to worsen."

In essence, investors cheered the Fed's action, but this was "canceled out" by the Senate, and this stress is transferring over to the equity market, the strategist said. 

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Invest For Minutes Or Years

Investors looking to establish a position at today's levels need to have a timeframe in mind that spans "minutes or years, and nothing in between," Emanuel said. Investors are encouraged to have a one-to-three-year timeframe, he said. 

Ultimately, the virus will come under control, and now might be a good time for "tip-toeing" or adding to exposure, the BTIG strategist said, adding that there is still a risk of a further downside, but an investment at current levels is likely to pay off over the coming years.

The Wildcard

The biggest wildcard moving forward is how the general population will act once the virus is resolved, Emanuel said.

If by September many are hesitant to eat out at a restaurant or get on a plane, there is a chance of further economic downside, he said. 

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