If there’s one thing that isn’t keeping hedge-fund king Leon Cooperman up at night, it’s worrying about a stock-market bubble.
“I think the market’s OK. It’s not cheap, but it’s not priced to perfection,” the billionaire founder and chairman of Omega Advisors Inc. said in an appearance Sunday on Wall Street Week. “The bubble is not in the stock market. If there’s a bubble, it’s in the bond market.”
So, why is Cooperman so sanguine, when others on Wall Street can’t stop worrying? Right now, he’s not expecting at least three of the four horsemen of the apocalypse of stock market’s past to come riding over the horizon.
Cooperman said four things have triggered a bear market in the past: The stock market “smells an oncoming recession” and starts to fall as it anticipates a recession; the environment gets “very sloppy,” characterized by a “frothy” market and “exuberant” investors; there is a geopolitical event; and lastly, the Federal Reserve “takes the punch away from the punch bowl.”
Except for a geopolitical event, which can’t really be predicted, the other triggers just aren’t present, said Cooperman.
Some on Wall Street are growing increasingly certain that the central bank will strike with its first interest-rate increase in September. Some are even thinking June is a possibility. And that’s even as data hasn’t been as convincing to some — nonfarm-payrolls data out Friday pointed to a pace of jobless growth healthy enough to show economic growth, but not too much to quicken a rate hike.
WSJ Chief Economics Correspondent Jon Hilsenrath explains that the Federal Reserve, which is expected to wait several months to raise interest rates, is focused on managing Wall Street’s expectations.
“The market is overdue for a healthy correction, and the Fed tightening is likely to be the catalyst,” David Lafferty, chief market strategist at Natixis Global Asset Management in Boston, told Bloomberg on Monday in this article: ”U.S. stocks on wrong side of history with rate increase in sight.”
Cooperman argued that all that Fed angst may be for naught, though, as history shows that first hike isn’t so bad for stocks. “On average, after the first Fed tightening one year later, the market is higher by an average of a little under 10%. And I think the initial stage of rising interest rates are indicative of an improving economy, rising earnings, rising dividends — and the market likes that,” he said.
The problem comes when the Fed starts to raise rates to levels that are “competitive with stock-market returns that you have a problem. The bigger problem is if we’re sitting here a year from today and the Fed hasn’t raised rates. That suggests there is something wrong with the economy, because of the inability of the folks in Washington to get their act together,” said Cooperman.