Hedge fund manager Doug Kass is bearish on stocks, despite the market’s recent rebound.
“The odds favor that the rally over the last two days of January and into the first week of February may have been a bear market rally, … providing a great trading opportunity, but not likely the basis for a new bull market leg,” the president of Seabreeze Partners Management wrote in a commentary to clients.
The S&P 500 has slipped 5.5% year to date, but gained 6% from Jan. 27 to Feb. 2.
Kass, a columnist for TheStreet's Real Money Pro, foresees a “normal 15% valuation reset lower” for the stock market this year, which matches historical performance when the Federal Reserve lifts interest rates by 1 percentage point.
And valuations are high, Kass noted. The S&P 500 trailing price-earnings multiple recently stood at 25.7.
Rampant inflation and rising interest rates amid a slowing economy are putting the market at risk, Kass said.
Consumer prices soared 7.5% in the 12 months through January, an almost 40-year high. Meanwhile, the 10-year Treasury yield has jumped to 2% from 1.51% on Dec. 31.
And economists’ forecasts call for the Fed to raise rates as much as seven times this year, with some expecting a 50-basis point move in March.
In addition, supply chain woes will continue through this year, Kass said. In this environment, corporate earnings are under pressure, he said.
Some companies saw beefed-up profits during the pandemic that will now come down, Kass said. These include Meta Platforms (FB), Peloton (PTON), Zoom Video Communications (ZM) and DocuSign (DOCU).
