A long time ago, an old mentor once said “it’s easy to be bearish, but how do build a bullish argument in spite of the bearish news?” No matter what point in history you pick, you will find reasons to be downright scared of the future.
In the 1940s, it was World War II. In the 1960s, the Cuban Missile Crisis. In the 1970s, Stagflation. In the 1980s, sky high interest rates.
There is always some good reason to be worried about investing capital. Today, inflation, rising interest rates, a potential escalation of the Russia-Ukraine war, and the threat of China invading Taiwan all weigh heavily on investors’ minds. So how do you invest?
- Stan Druckenmiller is bearish on the market and contends that earnings could fall dramatically as a result of higher interest rates, meaning the market is overvalued now.
- Paul Tudor Jones is bullish on the market and believes that the Fed has finished raising rates and the stock market is likely to rise towards the end of the year.
- Jones believes that the market is akin to the one in 2006 where the market rose for another year after the Fed stopped raising rates.
What One Billionaire Says
The man with the perfect track record, Stan Druckenmiller, has made no bones about his fears for the current state of the economy. While he says he doesn’t see a “fat pitch”, meaning an easy or obvious trade, he does have a short dollar bet, a long gold bet, and a heavily hedged portfolio.
He has also expressed concern that earnings will fall dramatically as a result of higher interest rates. After all, the old adage is “don’t fight the fed”, which has clearly stomped on the brakes.
If earnings fall, it means the P/E ratio of the S&P 500 now is a mirage. While it currently sits at 23x, Stan has wondered whether an earnings plunge translates to an earnings multiple closer to 40x 6 months from now. If so, that would suggest the market is steeply overvalued now and due for a correction.
But let’s revisit that old advice from my mentor: how do you build a bullish argument in spite of the bearish environment? Paul Tudor Jones might have the answer.
What Another Billionaire Says
In a recent interview on CNBC, Paul Tudor Jones emphasized how the market is a discounting mechanism; it looks to the future so if the future looks brighter than the present, the market will anticipate it and rise.
As bad as things may be now, Tudor Jones believes the Fed has finished raising rates and the stock market is likely to rise towards the end of the year. Presidential election cycle theory supports his thesis.
That theory posits that US stock markets post their worst year in the first year of a president’s term, recover in the second year, and peak in the 3rd year, which would be this current year. Typically, they correct and fall in the fourth and final year of the term, according to the theory.
According to Tudor Jones, the Federal Reserve can declare victory now because CPI has fallen from 12 months straight, a feat never before seen in history. He believes the market now is akin to that of 2006 where the market rose for another year after the Fed stopped raising rates.
With all that said, he doesn’t think the equity markets will be off to the races this year but rather they will grind higher slowly. He also doesn’t think the bullish escalation kicks off before the debt ceiling debate is in the rearview mirror.
He further commented “We have no IPOs, no calendar, no secondaries, valuations are at 19 but nobody’s rushing to offer so clearly, something is going on internally in the stock market,” Jones said. “From a flow standpoint, that’s constructive.”