Paul Tudor Jones tripled his money in 1987 by correctly calling the October crash and he’s now a billionaire running one of the best known hedge funds in the world. So you’d probably pay attention to what he says about stock markets. However, he can be just as wrong as anyone else.
In April of last year Bloomberg ran an article describing a chorus of high profile hedge fund managers who were all bearish on equities, including:
- Paul Tudor Jones: US stock valuations were trading at unsustainable levels not seen since the 2000 dotcom crash; central bankers should be “terrified”.
- Scott Minerd of Guggenheim Partners: expected a “significant correction” in 3Q 2017.
- Phillip Yang of Willowbridge Associates: forecast a crash of 20-40% last year.
- Larry Fink of BlackRock: thought prices would fall 5-10%.
- Seth Klarman of the Baupost Group: quoted insider selling by company executives as a sign that valuations had become excessive.
All the managers are super smart and the arguments sounded perfectly reasonable: record levels of margin debt, the S&P 500 hitting new records while the PE ratio of 22 was at 10 year highs, the S&P 500’s total market capitalisation as a proportion of US GDP was at the highest since the dotcom boom, and the Fed raising interest rates would mean fewer buybacks.
Yet since the date of that article the S&P 500 has risen more than 19%. In fact, the MSCI World Index is up by 16%, and within that Japan is up by 29%, EM by 25% and even Europe rose by 9%. Overall it was a great year.
The S&P 500 has gone on to hit 63 new all-time highs since then and is now trading on a PE of 26.2 times.
Even the great George Soros was quoted as being bearish on US equities all the way from 2600 to 3500 on the S&P 500.
Human nature is such that we crave certainty; there’s a part of our brain that struggles to deal with randomness, which is much of what drives financial markets in the shorter term. Certainly billionaire traders don’t become billionaires for nothing, but there is yet to be a perfect crystal ball.