Michael Ochs Archive/Getty Images
Strategist raised stock price target
The strong rise in stock prices has led many strategists to raise their market outlook for this year.
Earlier this month, Wells Fargo equity analyst Christopher Harvey raised his year-end target for the S&P 500 index to 5,535 from 4,625.
The new figure would represent a 9% increase from Wednesday's reading of 5,060. He says his S&P 500 forecasts are the highest of any Wall Street forecaster.
Well, stocks hit a wall at the end of March, and the S&P 500 index is down 3.7% this month. The cause of the decline is unknown, but TheStreet Pro's Doug Kass has some ideas.
Kass is a hedge fund manager whose career spanned the 1970s and included a stint as research director at star investor Leon Cooperman's Omega Advisors. He currently runs the hedge fund firm Seabreeze Partners.
Mr. Kass recently correctly warned of increased risks that could cause stock prices to fall.
Related article: Veteran fund manager issues blunt warning about stocks
Hedge fund manager Doug Kass' thoughts on stocks
On April 22nd, Kass reiterated some of the market issues on TheStreet.com Pro.
-
Increasing geopolitical risks such as the Middle East conflict and the war in Ukraine.
-
Interest rates will remain high for a long period of time. The Fed expects that to be its strategy in the coming months.
-
troubling inflation and slowing economic growth, or “slugflation.”
-
Reckless fiscal policy has resulted in unprecedented budget deficits and a cumulative U.S. debt burden.
-
A dizzying evaluation. As of April 19, the S&P 500 index's forward price/earnings ratio was 19.9 times. That's higher than the five-year average of 19.1 times and the 10-year average of 17.8 times, according to FactSet.
“Risks come quickly, as April's poor stock performance demonstrated,” Kass said.
Kass quotes the philosophy of Evel Knievel
He cited famous daredevil bike jumper Evel Knievel's belief that danger is on both sides. Knievel, who passed away, said: “Risk is a good thing. Not managing risk properly is a dangerous leap.''
So how are stock prices lying now?
Related article: Analysts overhaul S&P 500 targets ahead of earnings season
“Given the recent decline from the grace period, the stock is no longer overvalued, but it remains relatively expensive,” Kass said. “This is especially true relative to interest rates and relative to the paper-thin equity risk premium.”
The five-year Treasury note yields 4.67%, more than three times the S&P 500's dividend yield of 1.4%. The equity risk premium is the estimated expected return on stocks minus the expected expected return on government bonds.
Fund managers buy and sell:
Kass' current outlook may come as a surprise considering his comments.
He believes the backlash has created some opportunities, but he needs to choose carefully.
“We expect the market correction to continue, but some individual stocks are starting to look attractive,” he said.
“During the market decline over the last few days, I went from a moderate net short to a moderate net long. I expect it to go even longer as more value emerges.” It means betting that the stock price will go down.)
Kass says he plans to buy more “as more value emerges,” but don't expect to buy anything. “We will be non-emotional, disciplined and analytical in our investment process.”
Related: Veteran fund manager picks stocks to watch in 2024
