Leon Cooperman

Leon Cooperman – Bonds are the Risky Asset

This article is based on a presentation from John Mauldin’s 2020 Virtual Strategic Investment Conference, which was held from May 11 to 21.

Q1 2020 hedge fund letters, conferences and more

Leon Cooperman

Image source: CNBC Video Screenshot

If rates stay low, the returns on stocks will be better than for bonds, according to Leon (“Lee”) Cooperman. “Bonds are the high-risk investment,” he said.

Cooperman spoke yesterday at John Mauldin’s 2020 Virtual Strategic Investment Conference. He is retired and previously founded and ran a hedge fund, Omega Advisors. He is a billionaire and philanthropist, having signed the Giving Pledge, a commitment to donate at least half of his wealth to charity.

The U.S. stock market is “reasonably fully valued,” Cooperman said, “not dramatically overvalued.” One reason he believes it is not overvalued is because of its composition, with 25% in high-technology stocks.

If the market is appropriately setting interest rates, he said, that means you will only make 2% to 4% in stocks. He based that on assumptions that the labor force will grow at 0.5% and productivity will grow at 1.5%, producing 2% real growth in the economy. To that he added 2% inflation, which would provide a 4% nominal return. He acknowledged that it will take several years to get to a 4% yield on the 10-year Treasury.

He said that a 4% yield implies a 17 P/E multiple for stocks. Applying that multiple to $150 per share in S&P earnings leads him to conclude that the market is fully valued.

Cooperman expressed deep concern about the country’s fiscal situation, which underlies his conviction that bonds are riskier than stocks.

We already had a trillion-dollar deficit before the virus problem, he said. “Someday this is going to catch up with us.”

If the dollar weakens and “inflation catches up,” Cooperman said, “the game is going to change.”

But at their fully valued levels, stocks present risks, Cooperman said.

For example, changes in the market structure make stocks more dangerous, he said. “The machines run the market.” Algorithmic traders buy strength and sell weakness, he said, and exaggerate price movements. Without commissions and with the weakening of the Volcker rule, there is more volatility. Cooperman said that 80% of trading volume in stocks is done off the exchanges. The uptick rule, eliminated in 2007, gave rise to high-frequency traders, which create “unnecessary volatility,” he said.

Read the full article here by Robert Huebscher, Advisor Perspectives


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