Two of Wall Street’s most renowned hedge fund managers offered contrasting outlooks this week on the markets, economy and where to invest in the current environment.
Omega Advisors founder Leon Cooperman said he would be “surprised” to see the S&P 500 rise much above its current level of around 4,100, while Tudor Investment’s Paul Tudor Jones is steering clear of stocks altogether over recession worries.
Though they disagree on the prospects for equities, both see risks from high inflation, tightening Fed policy and unsustainable fiscal deficits.
Cooperman Unenthusiastic on Stocks, Sees Recession Unlikely
Speaking at CNBC’s Financial Advisor Summit on Tuesday, Cooperman said the S&P 500 looks “uninteresting” at around 20 times earnings, which he views as too rich given the economic backdrop. With inflation running hot, interest rates on the rise and fiscal deficits near record highs, Cooperman believes investors need to be highly selective.
“I made my money picking stocks, and that’s, I think, the environment we’re in,” Cooperman said, comparing today’s landscape to when he began his career in 1967.
Rather than chasing broad market returns, the 78-year-old advocated searching out “inexpensive stocks” trading at discounts to fair value. He pointed to energy, which now constitutes 20% of his portfolio, as one area providing opportunities. With oil in the $80s per barrel, Cooperman sees producers such as Paramount Resources and Exxon Mobil as attractively priced.
Cooperman was strongly critical of long-term bonds, saying yields below 5.5% make little sense given inflation risks. He advised waiting for rates to top 5% before venturing into fixed income. For now, short-dated Treasurys are preferable to lock in current yields.
Though wary on stocks and bonds, Cooperman still believes a recession is unlikely in the near term. He credits aggressive fiscal stimulus for propping up growth and expects the Fed will try to engineer a soft landing. However, the heavy debt load leaves the U.S. vulnerable to a fiscal crisis if foreign lending dries up.
Tudor Jones Fears Stocks Vulnerable to Fed-Induced Recession
While Cooperman sees recession chances as remote, Tudor Jones views the risk as high enough that he is avoiding equities altogether. In an interview with CNBC Wednesday, Jones said he is concerned aggressive Fed tightening could tip the economy into contraction.
With inflation at 8.2%, the highest since 1981, the Fed has been rapidly raising interest rates to dampen demand. After hiking its benchmark rate from near zero in March to 3%-3.25% currently, two more increases are expected this year.
Jones believes the lagged impact of the Fed’s policy tightening has yet to be fully felt by markets. He expects the forceful actions required to bring down inflation will cause “some sort of recession” over the next 24 months.
Rather than stocks, Jones is focusing on short-term Treasurys, commodities and selective emerging markets investments. He said parts of Asia and Latin America appear better positioned than the U.S. to weather global headwinds.
Where the Investing Legends Agree
Despite their differing views on recession odds and stock market upside, Cooperman and Jones share concerns over several key risks:
- Inflation – Both warn current inflation rates are unacceptably high and see further Fed rate hikes ahead.
- Fiscal deficits – Cooperman called U.S. debt levels “very disturbing,” while Jones sees deficits as unsustainably large.
- Fed policy – While Cooperman believes the Fed can engineer a soft landing, Jones thinks aggressive tightening could trigger recession.
- Bonds unattractive – With Treasury yields low by historical standards, both managers see little value in long-term fixed income.
- Stocks selective – Jones is avoiding equities, while Cooperman stresses picking individual stocks over indexes.
Though the outlooks diverge on recession chances and index upside, the investing legends agree that caution and selectivity are warranted with risks tilted to the downside. Their views reflect an unsettled debate on markets and the economy as the Fed battles high inflation but may risk recession in doing so.