As Markets Reach New Highs, World’s Top Investors Ring Alarm

Jeffrey Gundlach's 'Mass Psychosis' Yield Theory

The big rally in stocks and bonds has some of the world’s top money managers putting up warning signs.

Laurence D. Fink and Howard Marks joined the likes of Bill Gross and Jeffrey Gundlach cautioning that buyers may be ignoring sluggish economic growth and Britain’s departure from the European Union as they look to put their money somewhere, anywhere, amid low interest rates.

Laurence Fink
Laurence Fink
Photographer: Chris Goodney/Bloomberg

“If we don’t see better than anticipated corporate earnings I think the rally will be short-lived,” Fink, 63, said in an interview Thursday.

A run-up in global stocks has added more than $4 trillion to the value of equities worldwide since June 27 on speculation central banks in major economies will boost stimulus. It’s been a swift turnaround from the doom-and-gloom surrounding global equities on June 24, the day after the British vote, when stocks lost $2.5 trillion in market value.

Bond Rally

On the fixed-income side, the speculative-grade bond market that was accompanied by bearish calls coming into 2016 has been on a tear, with gains at 12 percent for the year. But the global market rally, underpinned by low interest rates around the world, carries dangers, Marks, co-chairman of Oaktree Capital Group LLC, said in a telephone interview.

Howard Marks
Howard Marks
Photographer: Victor J. Blue/Bloomberg

“We are living in a difficult, low-return world that has been ignoring risk incidents," Marks said. “When the market shrugs off its problems, it is not a plus, as that permits problems to accumulate. Up-cycles don’t go on forever.”

Marks said investors who insist on jumping into less-liquid assets need to be willing to ride out the rough times.

Heartburn

“When you go into risk assets and they go through a tough period, there will be heartburn and price declines,” he said. “If you are going to need the money in the short term, you shouldn’t put it into potentially illiquid assets."

Janus Capital Group Inc.’s Gross and DoubleLine Capital LP’s Gundlach said sovereign bonds, with yields at record lows, were too risky. Gundlach said in a webcast earlier this week that there’s a “mass psychosis” among investors seeking yield.

“Call me old-fashioned, but I don’t like investments where if you’re right you don’t make any money,” Gundlach said.

Fink, whose firm cut about 3 percent of its workforce earlier this year, has said the Brexit vote will weaken global economic growth and makes another rate increase by the U.S. Federal Reserve unlikely this year.

Earnings Decline

BlackRock on Thursday reported a 3.7 percent decline in second-quarter earnings as clients shifted money from stocks to lower-fee fixed income and cash investments.

“Our clients are facing unprecedented challenges as they attempt to navigate the current investment environment,” Fink said in the firm’s earnings statement.

This type of investor skepticism is exactly why the S&P 500 Index’s seven-year rally has further to run, according to Laszlo Birinyi, the former Salomon Brothers Inc. analyst who called the post-crisis bottom for U.S. stocks in December 2008.

“If sentiment was more euphoric, we might be more in danger of forming a market top,” he said in a phone interview from Westport, Connecticut, Wednesday.

“The characteristics of the end of a bull market are not evident. Our stance continues to be that the market will go higher.” Heeding the advice of the 72-year-old president of Birinyi Associates Inc. has been profitable during a bull run that has lifted the S&P 500 more than 200 percent.

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