The U.S stock market and the economy are lacking many of the underlying principles previously used to explain them historically. Those are sentiments echoed by hedge fund billionaire, Leon Cooperman. He is the chairman and CEO of Omega Advisors, a New York-based investment advisory firm managing over $3.3 billion in assets under management. According to the billionaire investor, at current levels, the market is overvalued, having failed to price in, or factor, some of the developments that signal economic growth stagnation.
“If you go back to your school days — you have a sharp movement down, you have a bounceback, but… the growth rate in the economy going forward will be less than people think,” Cooperman said and predicted the market will see a square-root shaped recovery, similar to his thoughts following the 2009 market crash.
Ongoing Stock Market Rallies
The stock market has been running full throttle ever since the Federal Reserve hit back with a string of fiscal policies and stimulus packages in the wake of the market crashing amid COVID-19 fallout. Some markets have rebounded to the point of recording all-time highs with indices such as the NASDAQ flirting with record highs on a daily basis.
The current success in the stock market, according to Cooperman, should be attributed to free money that the Federal Reserve has created. The Central bank has pumped trillions of dollars through helicopter money and bond-buying programs, all in the effort of counteracting the impact of coronavirus.
Economic Growth Shocks
The surge to record highs does not paint a clear picture of the ongoing day-to-day in the economy. For starters, the economy continues to reel from the effects of the COVID-19 pandemic that is showing no signs of slowing down in America. In the aftermath of the COVID-19 pandemic bankruptcy levels have surged to levels last seen during the 2009 financial crisis.
Store closures and elevated levels of unemployment levels point to an economy that is crumbling amidst the disruptions triggered by the COVID-19 pandemic. While economic data has improved significantly in recent months, it is still yet to reach levels before the COVID-19 epidemic started causing havoc.
Cooperman believes the market is yet to factor the risks that the economy faces when the fallout of the pandemic begins to impact the American economy. Simmering tensions between the U.S and China is another development that the billionaire believes could weigh heavily on the economy, bouncing back to justify the hefty valuations in the stock market.
However, the biggest risk the market faces amidst the current elevated valuation levels is the ever-soaring debt level. The national debt has grown significantly since March as the Federal Reserve moved to calm the markets following the COVID-19 fallout.
Soaring National Debt
Instead of focusing on whittling down the federal deficit, the Donald Trump administration has resorted to piling on more debt to pay for tax cuts and boost the spending spree. With the debt levels growing at a faster rate than the economy, it spells more gloom and doom for the U.S economy amid the shocks triggered by the pandemic.
Talk of what shape the economic recovery will be has seen some economists tout a U-Shaped recovery. Others have touted a V-Shaped recovery with others throwing out the idea of a Nike Swoosh shaped recovery. Cooperman believes the recovery will come out as a square root symbol. According to the hedge fund manager, the economy’s growth rate will stagnate, given the unending uncertainty.
The uncertainty around the November Presidential election is another development likely to weigh on equity valuations going forward. As it stands, the market no longer cares whether a Republican will be in the white house next year something that the market often prefers.
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