- Stanley Druckenmiller, Howard Marks, and other investing legends have recently voiced concern about the pace of the stock market’s rally during a devastating economic crisis.
- Mutual-fund managers are also expressing this view in surveys and through their demand for companies with lots of cash.
- Experts worry the economy will recover slower than is being priced in, and are alarmed at the expectation that markets will perpetually gain from the Fed’s support.
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Some of the biggest heavyweights on Wall Street are worried that the fastest stock-market crash of their lifetimes is fading at an unsustainable pace.
The gradual reopening of shuttered businesses by states — including all 50 as of last week — is boosting investors’ confidence that the coronavirus-driven recession will be sharp but brief. Multiple reports of progress on a vaccine have also brightened expectations for a recovery and helped lift the S&P 500 more than 25% from its March 23 low.
Perhaps most importantly, the Federal Reserve and Treasury Department have led a massive effort to provide main street with the cash it forwent by going into lockdown, and Wall Street with the liquidity it needs to keep credit markets functioning.
The unprecedented scale of this support, particularly from the Fed, is at the heart of why several top investors doubt the longevity of the rally.
The roll call of skeptics begins with legendary investor Stanley Druckenmiller, chairman and CEO of the Duquesne Family Office. He was fairly bullish before the pandemic. But these days, he is speaking in bearish superlatives.
“The risk-reward for equity is maybe as bad as I’ve seen it in my career,” Druckenmiller recently told the Economic Club of New York during a virtual event. He worries too many investors expect that new liquidity from the Fed will flow into the markets indefinitely following a few strong months.
He is also concerned that the distributed stimulus money may not be sufficient to quickly recover the economy.
“I pray I’m wrong on this, but I just think that the V-out is a fantasy,” he said, referring to a V-shaped recovery.
Add Marc Lasry, the CEO of Avenue Capital, to the camp of those who anticipate a recovery that looks more like a U than a V.
The billionaire investor told CNBC he expected the US to be in a recession “for a while” due to the extent of damage on the scene.
“If you’re going to have all these people unemployed, it’s hard to end up coming out of a recession until that changes,” Lasry said. “It’s going to be a difficult couple years.”
Oaktree Capital, one of the world’s largest credit investors, is already positioning itself to profit from the wreckage. The firm reportedly plans to raise $15 billion for the largest distressed-debt fund in history, built to swoop in on struggling companies and assume controlling stakes in some, according to Bloomberg.
Its billionaire founder Howard Marks is also wary of the extent to which the market is propped up by the Fed.
“Those of us in the markets believe that stocks and bonds are selling at prices they wouldn’t sell at if the Fed were not the dominant force,” he told Bloomberg TV. “So if the Fed were to recede, we would all take over as buyers, but I don’t think at these levels.”
The mistrust of a quick recovery — and of this rally that is pricing one in — extends beyond the punditry of cable television.
A recent Bank of America survey of 194 fund managers who collectively oversee $591 billion in assets found that more than two-thirds of them think this is a bear-market rally. Only 10% of managers expect a V-shaped recovery.
A Goldman Sachs report on mutual fund holdings further exposed how some of these managers are expressing their views in portfolios. The net result of their allocation shifts is a reluctance to price in a brisk comeback.
“Shifts in mutual fund sector and factor exposures suggest that managers expect a U-shaped recovery,” said David Kostin, the chief US equity strategist.
He found that in the first quarter, the average fund reduced its allotments to strategies that stand to benefit from an economic recovery, including cyclicals and value stocks. Fund managers also reduced their exposure to bond proxies that would be protective during another severe downturn.
Instead of these characteristics, mutual funds prized stocks with balance sheets that are strong enough to weather a widespread solvency crisis.
Their sectoral allocation is also instructive. During the past month, fund managers have rotated from defensive sectors like utilities to secular growth sectors like tech and healthcare.
But Kostin is not quick to characterize this shift away from defensives as a bullish signal. After all, tech and healthcare are the best-performing sectors year-to-date, and managers who are tasked with beating the market do not want to miss out.
Kostin says their sector rotation simply shows a shift from “pessimism to skepticism around the economic restart.” And that quote captures why several investing legends are not calling the outright end of the crisis just yet.