Byron Wien

Byron Wien “equilibrium point is now above 3000 for the S&P 500”

Blackstone’s market maven Byron Wien expects that US stocks have most of their gains for this year behind them. He reveals what developments could surprise the financial markets next.

Q1 hedge fund letters, conference, scoops etc

To expect the unexpected is key to success in investing. That’s exactly what Byron Wien has built himself a reputation on: For more than thirty years the living Wall Street legend publishes a yearly list with ten surprises that will have a meaningful impact on the global financial markets.

“People all over the world are aware of it and identify me with it”, says the Vice Chairman in the private wealth group at Blackstone. “What they seem to like about it is that I put myself at risk by going on record and hold myself accountable at the year-end”, he adds.

So how accurate are Wien’s predictions for 2019 so far? Which developments could surprise investors during the rest of the year? And first and foremost: Where does the experienced market maven see the biggest risks and opportunities right now?

Mr. Wien, everybody on Wall Street knows you for your yearly prediction of ten surprises. What is the most astonishing development for you personally so far this year?

At the beginning of the year I predicted that the US stock market would be up 15% for the year. But here we are, at the beginning of May, and the S&P 500 already is up close to 18%. That’s the biggest surprise to me.

What’s going to happen next?

As the year began, the S&P 500 was selling at less than 15 times earnings and investor sentiment was clearly negative. These were near-perfect conditions for a strong market rally. Now the index is selling at 18 times trailing earnings and sentiment is optimistic. That would suggest that equities might have a more difficult time between now and year-end. So the market has done the major part of the appreciation. I don’t think that stocks are going to be up 45% for the year or even 30%. I would not be surprised to see the market consolidate during the remainder of the year.

What are the major roadblocks going forward?

We’re not in danger. When the market went down in the fourth quarter of 2018 a lot of people thought we might have a recession in 2019 or 2020. I don’t think that’s likely. I don’t see a recession before 2021 and maybe even beyond that. Also, I think inflation is going to remain subdued and interest rates are not going to go up much. But I am worried about wages going up because average hourly earnings increases are already at 3.2% and 4% is the danger point.

Also, quarterly earnings are declining for the first time in three years. What’s the state of Corporate America?

The first quarter was tough but I think earnings are going to go up 5% this year for the S&P 500. The economy is growing at 2%, inflation is at 2% and you are going to get 1% from productivity. So in the end, I expect that earnings and interest rates will be the determining factors and that geopolitical issues will cause temporary angst but not have a lasting effect on market performance.

And what about interest rates?

I think interest rates will stay below 3% on the ten-year treasury. From 2008 to the present time, the balance sheets of the major central banks in the US, Europe, the UK and Japan went from $3 to $16 trillion and a lot of that money is sloshing around, looking for a place to hide. That’s why interest rates are going to stay lower than the consensus expects. You have negative interest rates in Europe and in Japan. That makes US Treasuries more attractive to investors which keeps prices high and rates low.

What does this mean for the stock market?

Stocks compete with bonds. Therefore, I like to apply a time-proven dividend discount model which projects the level of the stock market based on earnings and interest rates. With two variables, the ten-year yield and the level of earnings of the S&P 500, I can tell you the equilibrium point where stocks and bonds are equally attractive. Because interest rates are so low today, that equilibrium point is now above 3000 for the S&P 500.

Last year, you predicted that West Texas Intermediate oil would reach $80 a barrel. It almost got there but then it dropped back to $50. Where will oil be at the end of this year?

Oil is headed higher but not a lot higher from here. I don’t think it’s going to be $90 or anything like that. The price of oil is being affected by Russia and OPEC and their decision to restrict supply. Since we have an artificial control of the flow of oil, I’m reluctant to say that the price is going to go a lot higher than it is right now. Today, the price is where the major producers want it to be. They will work to keep it where it is because if they raise it a whole lot more, the danger of alternatives and hydraulic fracking becomes more real.

Oil is the lubricant of the global economy. What’s your economic outlook for the remainder of 2019?

The US is definitely doing better and I think it will do better in the second half of the year. The US economy is still 70% consumer driven and the consumer is in good shape. Europe is not doing well. But I’m even kind of optimistic about Europe because China is getting better which will help Europe. So I see the second half being somewhat better for the world than the first half.

Then again, just a few weeks ago, the yield curve in the US has inverted. Isn’t that usually a harbinger of trouble to come?

Usually the yield curve inverts because the short rate goes up. In this instance however, the yield curve has inverted because the long rate has come down. In other words, it isn’t the short rate going up that has caused the inversion, it’s the long rate going down. That may have a different set of information content or principles embodied. So the yield curve inversion may not be signaling the onset of a recession as it has in the past. Additionally, everybody is worried about this cycle because it’s so old. But recessions come about because of excesses and there aren’t a lot of excesses in the system right now.

What does this mean for the Federal Reserve and monetary policy?

At the beginning of 2019, I said that the Federal Reserve won’t raise interest rates at all this year. That was before they announced that they will pause at the current level of 2.25 to 2.5%. I still think that’s where they will stay all year long. People are talking about them cutting rates but for me that’s out of the question. The Fed will wait to see that the economy is on solid ground.

Read the full article here by Christoph Gisiger, The Market NZZ


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