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    Veteran fund manager predicts a world of pain ahead for stocks

    msmarkBy No Comments4 Mins Read

    The stock market has been a roaring success over the past two years, with the S&P 500 up 44% and hitting several record highs this year.

    Now the debate between bulls and bears is heating up: will the party continue, or is it time for a major pullback?

    Optimists expect the Federal Reserve to cut interest rates, perhaps twice this year. That would stimulate the economy and boost corporate profits.

    Doug Kass, one of the country’s most prominent investors.

    They say easing inflation would allow the Fed to act. Consumer prices rose 3.4% in the 12 months through May, their lowest level in more than three years.

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    Optimists point out that earnings are already starting to pick up. Earnings per share for the S&P 500 rose 5.9% in the first quarter from a year earlier, according to FactSet.

    Analysts are expecting an 8.8% gain in the current quarter. If true, that would be the biggest gain since the first quarter of 2022.

    bearish condition

    But pessimists say this estimate is overblown. They claim that the market has gone too far anyway.

    As of June 14, the S&P 500’s forward price-to-earnings ratio was 21, well above the five-year average of 19.2 and the 10-year average of 17.8, according to FactSet. “Forward” means the ratio is calculated based on analysts’ earnings estimates for the next 12 months.

    Related: U.S. stocks widen gap with global markets as investors pour money into S&P 500

    The pessimists also expect the Fed to leave interest rates “higher for longer.” The latest forecasts from Fed officials have yielded a median estimate of just one rate cut this year.

    Pessimists say inflation is holding up. The personal consumption expenditures price index, the central bank’s preferred measure of inflation, was 2.6% in the 12 months through May. That’s down from 2.7% in April but still well above the Fed’s 2% target.

    Doug Kass’s View on Stocks

    Hedge fund manager Doug Kass, author of TheStreet Pro Daily DiaryHe represents one of the bears. His opinion is well qualified given his career as a hedge fund manager dating back to the 1970s. That includes a stint as research director at legendary investor Leon Cooperman’s Omega Advisors.

    “The market is flying too close to the sun,” Kass wrote in his article. Comment on Street ProHe was referring to the mythological figure Icarus, whose wings melted when he flew too close to the sun.

    Here are three of the negative points of Cass.

    1. Interest rates have risen, and the risk premium on equities is at its lowest in decades, he notes. The yield on the 10-year U.S. Treasury note has jumped 0.57 percentage points to 4.44% so far this year.

    The equity risk premium is the excess return that investments in the stock market provide compared to investments in Treasury bonds.

    Related: Veteran Fund Manager Sounds Alarm on Stocks

    A lower current premium means that investors don’t see much benefit in investing in stocks compared to Treasury bonds. This suggests that stocks may fall.

    Meanwhile, the S&P 500’s total dividend yield is just 1.29%, compared with a 5.3% yield on six-month U.S. Treasuries.

    Kass noted that it is rare for Treasury yields to be four times the S&P 500 yield. Falling stock prices would certainly push up dividend yields.

    The Federal Reserve has a strong performance.

    2. Investors’ expectations for one or two rate cuts by the Federal Reserve this year have fallen, compared to expectations earlier this year of six rate cuts.

    3. “The stock performance was very strong, with returns being mixed across five large-cap tech companies,” said Kass.

    Sultan of semiconductors Nvidia (NVDA program) Technology stocks have contributed about 35% of the S&P 500’s gains so far this year, he said.

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    The other four are the alphabetical search king. (Google) Social media giant Meta Platforms (Meta) the powerful software company Microsoft (Microsoft) and retail/tech giant Amazon (Amazon) They account for 26% of the S&P 500’s return this year.

    “Not since the 1960s have five stocks contributed so much (61%) of the total market return,” Kass said. “We should learn from history because these divergences ended badly and unexpectedly.”

    Related: Veteran Fund Manager Picks His Favorite Stocks for 2024

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