Guggenheim's Chief Investment Officer Scott Minerd made headlines at the Davos World Economic Forum back in January when he referred to the market as a "Ponzi scheme," with valuations in a dangerous position.
Of course, we all know what happened next - the market peaked in February, then collapsed as lockdown panic set in.
Since then, valuations have rebounded significantly. In a recent interview with Bloomberg, Minerd gave his updated thesis on the market and the direction that he sees it going in.
A Fed-driven rally
As Minerd pointed out, the top five stocks in the S&P 500 represent around 30% of the overall capitalization of the whole index, so a market rally should not necessarily be interpreted as a signal of overall economic health. He believes that the equity rally is directly tied to the result of recent Federal Reserve activity in the corporate bond market, and he doesnât think that the Fed will change course any time soon. Accordingly, he thinks that stocks will continue to rise - with the caveat that this is a bubble:
âI was on record as saying that I thought this was a bubble. It looks like the bubble that we lived through in the late 90s. And if we recall that in 1998, in the era of âirrational exuberanceâ (according to the Fed Chairman Alan Greenspan), the rally went on for two more years. The nature of bubbles is that they go on long and itâs hard to predict when they will end. Thereâs clearly money to be made in the stock market, but in terms of risk-adjusted returns I think youâre better off being in high-yield and corporate bonds.â
Minerd added that the Federal Reserve doesnât seem sure whether they want to label the recent market rally as a bubble - understandable, given the unrest that would cause. Regardless of their language, however, itâs clear that the current policy of lending money at ultra low rates to struggling companies is likely to lead to some kind of debt bubble.
Corporate borrowing is at record highs and businesses donât seem interested in paying it back. Minerd thinks that the artificial monetary stimulus enacted by the Fed will support asset prices in the short term, but a surge in defaults on Main Street might be the catalyst that breaks the momentum in the rally. Minerd summed up his argument thus:
âSo whether itâs tomorrow that the chickens come home to roost, or three years from now, the day of reckoning will come. My bet is that monetary policy will remain loose enough to drive risk assets higher.â
Disclosure: The author owns no stocks mentioned.
Read more here:
- The Value Investor's Handbook: More Lessons From the Cash Flow Statement
- Warren Buffett on Dividends
- Howard Marks: Will Algorithmic Investing Beat Out Humans?
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