The bull market has at least two years to run, and possibly more.
This is the prediction that I have been hammering away at listeners at my many speaking engagements, webinars, and global strategy luncheons all year.
But don’t take my word for it.
This also happens to be the opinion of my friend, Leon Cooperman, the legendary hedge fund manager at Omega Advisors.
I called up my aged mentor in New York last week, where we jointly analyzed and dissected our investment future.
Lee wasn’t interested in discussing his recent settlement with the SEC, where he shut down a persecution with a modest $4.5 million payment.
Leon thinks that at a 20X earnings multiple, valuation are a little rich. He expects a total return for the S&P 500 (SPY) of 7-9%, including a 2% dividend.
His outlook for all fixed income investments (TLT) is extremely negative, which he sees at an extended bubble top.
There are only four possible causes of a recession from here:
1) Corporate earnings fall. But they are in fact increasing at a respectable pace.
2) Stocks become overvalued. However, 20X multiple is reasonable given that interest rates are still near zero.
Many of the largest firms are trading at big market discounts. Apple (AAPL) is the prime example, is the most widely owned stock in the world, and sells at a very modest 15X current cash earnings.
During the 2000 dotcom bubble top, Apple sold for 34X earnings (which today would value the company at a staggering $1.8 trillion, or 9% of US GDP!).
3) A hostile Federal Reserve would certainly take the punch bowl away. With deflation running amok globally, it is unlikely that the Fed makes more than modest moves this year. The stock market could easily handle the seven 25 basis point hikes that are planned.
4) A geopolitical crisis would certainly throw a spanner in the works. These are unforcastable, and all the current ones ISIS, Iran, Syria, Afghanistan, and the Ukraine, are inconsequential.
Cooperman observes that bear markets don’t arise from an immaculate conception, but a visible turn in the economic data flow.
Given that, of the hundreds of data points Leon tracks on a weekly or monthly basis, not a single one is pointing towards recession.
That said, he cautions that the market historically peaks an average of seven months before every recession.
Stock markets also rise an average of 30 months after the first Fed rate hike, producing a typical 9.5% return in the first year, which brings us to his two year upside target.
Don’t get too excited. The outsized annual gains seen over the past four years are now firmly in the rear view mirror.
The years ahead are more likely to bring a couple of yards forward and a cloud of dust, much like we have witnessed so far in 2017.
Leon is urging his clients to take the most negative stance possible regarding their bond holdings. That means shorting duration (maturities), and moving up the credit curve.
Shorter and safer is the way to go.
Avoid junk bonds like the plague, which are among the most overvalued in history. The IShares Iboxx High Yield Corporate Bond ETF (HYG) is currently yielding a minuscule 3.14%!
A 2% GDP growth rate and a 2% inflation rate should give us a 4% yield on ten year Treasury bonds, not the lowly 2.20% we see on our screens today.
Look out below!
Cooperman is one of the few individuals I drop everything to listen to. He spent 25 years at Goldman Sachs (GS) (see my Trade Alerts), eventually rising to the head of research.
The outcome has been a highly data driven investment strategy which almost always makes money. I crib from him constantly.
Leon took off to start his own hedge fund in 1991, Omega Advisors, the same year I did, and became an early investor in my own fund.
His returns have since been stellar, and Leon is regularly ranked as one of the top ten investment strategists in the country.
Ignore Leon at your peril.
Leon gave me his short list of favorite stocks to own right now, many of which you already know and love from reading the Diary of a Mad Hedge Fund Trader. They include Google (GOOG), Citibank (C), and aircraft leasing company Air Cap Holdings (AER).
With that, I thanked Leon for his always sage and prescient advice, and promised to revisit these issues with him in New York next month.
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