US stocks are in a bubble, and it's unclear when it will pop, hedge fund manager says
Posted February 8, 2021 1:17 p.m. EST
CNN — The V-shaped recovery in the stock market is gathering serious momentum.
The S&P 500 is now 75% higher than its low point last March. The Nasdaq has more than doubled since its pandemic low. Tesla shares are up a staggering 900% over that span. And an army of traders on Reddit were able to send GameStop to the moon, at least for a few days.
Although there is good reason for optimism about the economy and the pandemic, some fear the market euphoria is getting out of hand -- yet it's impossible to time the bubble's burst.
"I do think we are in a bubble like we were in 2000," veteran hedge fund manager Mark Yusko told CNN Business. "That doesn't mean that tomorrow the market is going to crash."
Yusko, the CEO of Morgan Creek Capital Management, pointed to signs of extreme market speculation, such as the 1,625% spike for GameStop in January.
"Equity markets broadly are in bubble territory. Look at the parabolic moves by a number of companies like Tesla," he said.
Tesla shares gained another 2% Monday after the company announced it is investing $1.5 billion in bitcoin and will begin accepting the cryptocurrency for payment.
Yusko also pointed to how Apple's annual net income has barely budged over the past five years. But per-share earnings, which drive share prices, have climbed sharply because the iPhone maker has aggressively repurchased its shares.
"That's just financial engineering," he said.
Impossible to time
Another exhibit in Yusko's bubble case is Snowflake. The money-losing cloud computing company, which went public in September, is trading at 327 times revenue, according to data provider Refinitiv. That's well above what even Zoom and DocuSign trade at.
Yusko's bubble warning echoes ones made in recent weeks by other well-known market players.
Last month famed investor Jeremy Grantham said the bull market that began in 2009 had "matured into a full-fledged epic bubble" marked by "extreme overvaluation, explosive price increases, frenzied issuance and hysterically speculative investor behavior."
Of course, no one can time when a bubble will pop. And overheated markets can get much hotter before finally cooling off.
"The challenge with extreme valuations is they can go on longer than you think," Yusko said.
And Yusko has been overly bearish before. Two years ago, he warned that the stock market was overvalued and tech stocks in particular would fall sharply. Yet the S&P 500 is up more than 40% since then — despite the worst pandemic in a century.
Morgan Stanley: Get on board or get out of the way
While Yusko and Grantham are sounding the alarm, some major Wall Street firms remain very optimistic on the economy and the stock market. They point to the persistence of rock-bottom interest rates that have forced investors to bet on stocks.
Goldman Sachs upgraded its forecasts for second-quarter 2021 and 2022 GDP on Monday because of a sense that Democrats will pass a significantly larger relief package than previously anticipated.
Meanwhile, Goldman Sachs expects the S&P 500 to climb to 4,300 by year end, up about 11% from current levels.
Michael Wilson, equity strategist at Morgan Stanley, thinks the stock market's Reddit-driven scare is already firmly in the rearview mirror.
"It appears that greed once again has the upper hand over fear and the bull market is ready to resume in earnest," Wilson wrote in a note to clients Sunday.
After suffering its worst week since October, the S&P 500 rapidly regained its losses last week, spiking 4.7%.
Even though Wilson has recently called out signs of complacency and extreme risk, he is warning his clients not to fight this market rally.
"The prevailing view of better economic growth, more fiscal stimulus to come and continued money printing from the fed has everyone 'all in,'" Wilson wrote. "When such periods occur, it's rarely been easy or wise to get in the way. Instead, these trends typically need to run their course until they are derailed or simply exhausted."
Even Yusko, the Morgan Creek hedge fund manager, is diving headfirst into one area of market speculation: SPAC mania.
Special purpose acquisition companies, or SPACs, are shells with no operating assets that exist purely to take private companies public. Virgin Galactic, DraftKings and Nikola have all gone public this way instead of a traditional IPO. Even former baseball superstar Alex Rodriguez is trying to raise $500 million through a SPAC called Slam Corp.
Late last month, Yusko launched Morgan Creek Exos SPAC Originated ETF, a fund that will target pre- and post-merger SPACs with an equal weight approach.
But some argue SPACs are more evidence of bubble-like behavior on Wall Street.
SPACs are "an invitation to give me your money and I'll let you know one day what I'm going to do with it," Grantham recently told CNBC.
During the first three weeks of 2021 alone, SPACs raised $16 billion, surpassing the $13 billion that was raised in all of 2019, according to Goldman Sachs.
"Bubble-like sentiment surrounds SPACs," Goldman Sachs analysts said.
Yusko disagreed with that sentiment and suggested the criticism from Goldman Sachs is convenient because the Wall Street bank relies on traditional IPOs for a chunk of its revenue.
"It's intellectually lazy to make that statement," he said. "Saying SPACs are the problem is like saying hedge funds or mutual funds are the problem. It's just a legal structure."
Yusko said SPACs are cheaper, more flexible and a smarter way to raise money than traditional IPOs.
Unlike the other two SPAC ETFs that have recently launched, Yusko's fund is actively managed. That's critical, he said, because not all SPACs will be winners, especially given the loftiness of current market valuations.
"We are in an environment," Yusko said, "where we believe caution is warranted."