Veteran fund manager highlights lurking stock market risk

A bull market is raging for stocks, with the S&P Five hundred index hitting 42 record closing highs this year, while soaring greater than 20%.

Some experts think the birthday party will keep right on rolling along. They cite strong earnings as one factor.

S&P Five hundred earnings jumped eleven.three% in the second quarter from a year earlier, in keeping with FactSet. While analysts predict the expansion to decelerate to Four.6% in the 1/3 quarter, that’s still a buoyant number.

Interest-rate cuts by the Federal Reserve also will probably be useful stocks, bulls say, as the reductions boost economic growth, thereby stimulating earnings growth too.

The Fed slashed rates by 50 basis points Sept. 18, and experts predict the central bank to move every other 25 or 50 points at its meeting Nov. 6-7.

In 12 of the Fed’s 14 rate-cutting campaigns since 1929, the S&P Five hundred posted a positive return twelve months after the initial cuts, in keeping with a Schwab report.

Here’s the bearish case for stocks

But bears note that the S&P Five hundred hasn’t suffered a ten% correction for 288 days (or greater than 9 months), in keeping with PNC Financial Products and services. That compares to a mean of 172 days (greater than 5 months) between 10% drops since 1928.

Valuations also argue for a market correction, pessimists say. As of Sept. 20, the S&P Five hundred traded at 21.Four times analysts’ earnings forecasts for the following twelve months, in keeping with FactSet. That’s well above the 5-year average of 19.5 and the 10-year average of 18.zero.

While there prove to be kind of a lot of speak about these risky fundamentals for the market, TheStreet Pro columnist Doug Kass sees a less publicized risk – the market’s structure.

And he should know. Kass has worked as a hedge fund manager for the explanation that Seventies, including a stint as director of research for legendary investor Leon Cooperman's Omega Advisors.

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“Markets have increasingly change into unhinged, both on the down and up sides,” Kass wrote in a recent column.

“Subsequently, price moves are exaggerated and a few very weird stock outliers have populated our markets. Think GameStop, AMC Entertainment and most of Cathie Woods' Ark Innovation ETF portfolio!” Those stocks ran up after which plunged over the last few years.

“Inefficiencies, sharply exaggerated stock action and investing pain and gain are the byproducts of this day's perilous market structure,” Kass said.

Doug Kass’ concerns about market structure

So what are the structural issues?

1. Passive domination: “The swift transition from active money management to passive has been profound,” Kass said. “Passive strategies account for about seventy 5% of trading volume.”

The passive managers have shortfalls. “They most often know the entire thing about stock prices and nothing about [fundamental] value,” Kass said.

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Quantitative funds, whose investments are determined by computer algorithms, “know absolutely nothing about Nvidia's fundamental outlook but the entire thing about its price momentum,” he said.

“And never discussed is that passive strategies are often dramatically leveraged products, holding obvious risk when momentum changes and individuals are on the identical side of the investing boat.”

2. Increased Crazy: “Social media, meme stocks, message boards, etc. have served up some crazy price action,” Kass said. And that action has provided more losses than gains, he said.

“The notion that a small group of traders think they're smarter than the final population of investors never ends well. And this phenomenon (read: reckless gambling) continues to sprout up.”

Dangers amid options, technology, transparency

1. Option speculation has intensified: The proliferation of zero days to expiration options, which now account for the majority of options trading, is every other market structure risk, Kass said. The short expiration can mean very volatile moves for the options.

Fund manager buys and sells:

• Experts cite stocks to purchase after Fed rate cut
• Cathie Wood divests $23 million of surging tech stocks
• Top value fund manager says Alphabet is deep-value stock

2. Technological advances raise risk: “Computer-generated investing strategies, intended to create a method of safety for retail investors, have often backfired in market history,” Kass said.

three. Heightened risks of expanded transparency: “This present day's transparency has an upside: it provides instantaneous information to the masses,” which prove to be previously limited to the rich, he said.

“The difficulty with transparency, though, is that kind of just a few or not it truly is inaccurate.” And which will bring about major investment losses.

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