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Half-Trillion Asset Manager Suddenly Warns of 10-Year S&P 500 Snooze

Last Updated September 23, 2020 2:31 PM
Joseph Young
Last Updated September 23, 2020 2:31 PM
  • The large-scale private equity firm Blackstone’s executive foresees the possibility of a decade-long S&P 500 slump.
  • The firm’s executive vice-chairman Tony James said the stock market’s maxed out valuation is a potential roadblock in the longer term.
  • The Fed’s aggressive policy and the surging global liquidity led to a noticeable increase in appetite for high-risk assets.

Blackstone, which manages $571 billion in assets, suggests a possibility of a decade-long S&P 500 slump has emerged.

The private investment firm’s executive vice-chairman Tony James said disappointing long-term earnings growth poses a threat to equities. 

S&P 500
The 6-month performance of the S&P 500 index. | Source: Yahoo Finance

The “Fully Valued” S&P 500 Now in Trouble

Throughout the past five months, the Federal Reserve has maintained an aggressive policy  to ease the pressure in the markets.

The Fed has reaffirmed its stance to retain low-interest rates for extended  periods. The confluence of the low-interest rate and rising global liquidity have caused investors to become more active.

According to James, that trend caused stocks to get “fully valued.” Tech-heavy indices, including the S&P 500, saw large gains since the World Health Organization (WHO) declared the pandemic in March. 

The primary argument for a prolonged stagnation in the stock market is that stocks have little room to grow.  Their valuations have mostly maxed out, buoyed by the surging global liquidity.

The Fed prevented a “major meltdown” with its strong policies. But a side-effect of that has been a super fuel for the S&P 500 . The index increased by 47.56% in the past six months.

apple stock
The 6-month trend of Apple stock shows the momentum of tech stocks. | Source: Yahoo Finance

In the near term, the optimistic trend of stocks and the S&P 500 could continue. James emphasized there is an immense amount of capital on the sidelines. He said:

“Zero interest rates is the driving force here, near zero interest rates. There’s a hunger for yield so investors are coming off the sidelines — there’s still a lot of money on the sidelines, actually — and looking for investments that they can get some kind of returns.”

But over the longer term, he said, “disappointing long term earnings growth ” could become a problem. He noted that it could cause “economic headwinds for companies.”

The S&P 500 index recorded a vertical rally within a short period of time. James said he sees “anemic equity returns over the next five to 10 years based on the trend of stocks.”

Possibly Avoided the Worst Outcome

Even if stocks post subpar growth in the medium term, the U.S. stock market avoided the worst outcome. 

Without the Fed’s “unprecedented” speed, strategists say that the market could have fallen apart “very quickly.” James added:

“The Fed move was unprecedented size and speed … without that, there was serious risk of spiraling down to a kind of depression and when you start having that credit problems, it will ripple through markets very quickly.”

At least in the foreseeable future, the Fed is unlikely to raise interest rates until 2024 . For the S&P 500, that could prevent a severe correction from materializing.

Some strategists expect the equities market to continue rallying, especially after the Fed meeting. Watch the video below:

BMO Capital Markets deputy chief economist Michael Gregory said “rate hikes” will be a 2024 narrative “at the earliest.” 

As long as interest rates remain low, the prospect of a massive S&P 500 pullback is unlikely. But whether that would translate to an extended rally remains uncertain. For now, strategists appear to be cautious.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the securities mentioned.