Omega Advisors founder Leon Cooperman expects US equity returns to fall to single digits this year, but he doesn’t think the bull market has run its course
The S&P 500 is off to a rocky start, pulling back up to even after a couple of dips, but Omega Advisors founder Leon Cooperman expects the bull market to continue and for the S&P 500 to deliver a total return of 7% – 9% this year, 2% in dividends and the rest from earnings growth, according to a letter to investors reviewed by ValueWalk.
“We believe that the in-place U.S. equity bull market should last for quite a while longer, deliver moderate (high-single-digit) total returns rather than the strong double-digit returns of the past three years, be more volatile than in previous years, and have greater breadth,” he writes in a letter to his investors.
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Bull market likely to continue, says Leon Cooperman
While we’re well into the bull market, Leon Cooperman points out that most post-war recessions in the US follow a similar pattern. Economic growth peaks, inflation starts to get out of control (or actually just gets out of control), the Fed starts hiking interest rates aggressively to reign in an over-heated economy, and then a recession hits.
The business cycle peak precedes the market peak by seven months on average, but right now the US hasn’t even closed a significant output gap. While the Fed is expected to raise rates from basically zero to almost basically zero, it’s still nowhere near ‘aggressive’.
“In our view, the upcoming rate hike, whether it occurs in June, September, or even early next year, has been well telegraphed by the Fed and debated ad nauseam by investors. We therefore expect it to have minimal, if any, impact on financial markets. One could even argue that it will be met with a degree of relief, as investors bear witness to its irrelevance,” he writes.
Leon Coopermansays US equity valuations are fair to full
Leon Coopermanacknowledges that PE multiples are too high by some measures: CAPE Shiller, Tobin Q, and the market value of corporations as a percentage of GDP all point to valuations that are unsustainably stretched, but forward PE, price-to-book, and ex-financials median PE all point to market that’s neither cheap nor unreasonably expensive. He figures that we shouldn’t see any more multiple expansion, but doesn’t think valuations will pullback either.
Global tailwinds for growth
There are also some strong tailwinds for global growth that the US should benefit from. While the Fed is talking about ticking up its own rates, the average policy rate from major central banks is continuing to fall, pushing to 0.5%.
And while the Fed’s balance sheet will remain static for the time being, the Bank of Japan and the ECB are both fully committed to QE, which could be a good reason to invest in European stocks but will provide plenty of liquidity in general.
He also points out that for all of the dislocations caused by oil’s surprise price drop, Russia, Brazil, Venezuela and Saudi Arabia (the major net oil exporters) make up 10% of global GDP while the US, the eurozone, China and Japan (major net importers) make up more than 60% of GDP. Overall, falling oil prices are good for global GDP growth.