Stocks are too expensive especially considering the Federal Reserves considers the economy too weak to raise interest rates for the first time since 2006, says Doug Kass, star hedge fund manager Doug Kass, president of Seabreeze Partners Management.
“After six years of the Federal Reserve's quantitative easing and zero interest rate policy, the global economy is still in a condition that precludes a meager 25-basis-point rise to the fed funds rates,”
he writes in a blog post on TheStreet.com. “What does it say about the foundation of future U.S. economic growth when a zero-bound rate setting is failing to generate self-sustaining growth and escape velocity?”
The Fed cut rates to near
zero percent in December 2008 as the economy fell into the deepest recession in 80 years. Fed Chair Janet Yellen has said this year the central bank is looking to raise rates this year, which some Wall Street economists interpret to mean at its December monetary policy meeting.
Kass points to distressing signs evident in the real economy even as stocks hold steady with levels first reached in the fall of 2014. The S&P 500 stock index is little changed since the beginning of this year after rebounding from its August swoon that was first correction of more than 10 percent in four years.
North American railcar orders fell the most in at least 27 years on lower shipments of oil and sand used for drilling, according to Railway Supply Institute data cited by Kass. Meanwhile, manufacturers face threats from Chinese factories that need to dump finished materials on world markets to keep running, according to a newspaper story Kass cites.
“The global economy and the markets have never faced such a wide array of possible outcomes, many of which are adverse,” Kass says. “Yet market participants seem afflicted with a loss of memory and the belief that only positive outcomes stand to survive.”
Strategist Michael E. Lewitt also says the stock market is overvalued, citing historical valuation measurements.
The
Shiller cyclically adjusted price-to-earnings ratio, a measure of how expensive stocks are compared with their profitability, fell from 27 times to 24.7 times, Lewitt says in the October issue of
his Credit Strategist newsletter. That’s still above the long-term mean of 16.6 times, indicating that stocks are expensive and could decline more, Lewitt said.
The market’s direction will depend on the credibility of the Federal Reserve and other central banks, Lewitt said.
“The Fed is now facing the very real possibility that it will have to resort to more QE rather than raise rates,” Lewitt said. “Brave talk by Mrs. Yellen and her colleagues that markets should expect a rate increase by year-end grow dimmer with every down-tick.”
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