First it was bond gurus Bill Gross and Jeff Gundlach; then yesterday equity titan, Blackrock's Larry Fink joined in; now add Oaktree's Howard Marks. As Bloomberg puts it, the big rally in stocks and bonds has some of the world’s top money managers "ringing the alarm" just as the S&P hits all time highs day after day after day.
The aftermath of the global yield collapse sparked an unprecedented surge into all dividend paying stocks, the result of a scramble by investors to "put their money somewhere, anywhere, amid low interest rates." That susbequently morphed into the biggest 10-day short squeeze in history, which has since unleashed a buying spree of all stocks, unlike anything seen in years, as BofA reported overnight:
Monday (7/11) saw the largest HY inflows on record ($2.1bn – Chart 1), the largest equity ETF inflows since Dec’15 ($6.4bn) and the largest bank loan inflows in almost 3 years ($0.4bn)…the day when bears capitulated into risk assets
But will it continue? “If we don’t see better than anticipated corporate earnings I think the rally will be short-lived,” Fink, 63, said in an interview Thursday. “Our clients are facing unprecedented challenges as they attempt to navigate the current investment environment,” Fink said in the firm’s earnings statement.
To be sure, absolute market perfection has already been priced in. As David Rosenberg said yesterday, "when I look at valuations and I see PE multiples north of 20…I'm not going to say that the markets are in bubble territory but it's just a little too expensive for me right now. When you really back it out, if you're buying this market at this point you ipso facto have a view that earnings are going to rebound 25% from here in the next year. Well, we've seen earnings go up 25% in a year one-tenth of the time historically so that to me is not really a fair bet so...I'm looking at this rally I would have to say with a high dose of skepticism."
Keep in mind that the biggest trigger for optimistic earnings expectations and a strong second half EPS rebound has been the consensus assumption that oil would rebound strongly in the second half, with most models forecasting crude well north of $60. However, with crude having stumbled at $50 and now repeating the pattern of late 2015, once again sliding lower, this appears once again improbable. Meanwhile, after Q2, both earnings and revenues may see a 6th consecutive quarter of declines: something unprecedented since the financial crisis, yet something expected since the bulk of corporate (after debt) cash flow has gone not into growth investment but into dividends and buybacks.
However, the market is not worried: the run-up in global stocks has added more than $4 trillion to the value of equities worldwide since June 27 on speculation central banks in major economies will boost stimulus after Brexit, and coupled with . It’s been a swift turnaround from the doom-and-gloom surrounding global equities on June 24, the day after the British vote, when stocks lost $2.5 trillion in market value.
It does, however, have the "top investors" worried. The global market rally, underpinned by low interest rates around the world, carries dangers, Marks, co-chairman of Oaktree Capital Group LLC, said in a telephone interview with Bloomberg.
“We are living in a difficult, low-return world that has been ignoring risk incidents," Marks said. “When the market shrugs off its problems, it is not a plus, as that permits problems to accumulate. Up-cycles don’t go on forever.” Marks said investors who insist on jumping into less-liquid assets need to be willing to ride out the rough times.
“When you go into risk assets and they go through a tough period, there will be heartburn and price declines,” he said. “If you are going to need the money in the short term, you shouldn’t put it into potentially illiquid assets."
Janus Capital’s Gross and DoubleLine’s Gundlach said sovereign bonds, with yields at record lows, were too risky. Gundlach said in a webcast earlier this week that there’s a “mass psychosis” among investors seeking yield. “Call me old-fashioned, but I don’t like investments where if you’re right you don’t make any money,” Gundlach said.
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Still, while the world's biggest - and wealthiest - investors are pulling out, the usual suspects find nothing but blue skies. Case in point, everyone's favorite "ruler chartist", Laszlo Birinyi, who said this type of investor skepticism is "exactly why the S&P 500 Index’s seven-year rally has further to run."
Only it is no longer skepticism, following the biggest inflow into equity ETFs since 2015, and a "stampede into equities"
“If sentiment was more euphoric, we might be more in danger of forming a market top,” he said in a phone interview from Westport, Connecticut, Wednesday.
More euphoric that CNN's mostly Greed (what Fear?) index at 90?
“The characteristics of the end of a bull market are not evident. Our stance continues to be that the market will go higher.”
And why not: central banks are now openly willing to sacrifice social stability and threaten the collapse of globalization just to keep the music playing for a few more months.
World's worst investors choose to ignore world's top investors and buy record highs because Bob Pisani said it was ok