The stock market today is the second most overvalued in recent memory, trailing only that of 1999, during the dot-com era, says hedge fund chief David Tepper.
“The market is pretty high and the Fed has put a lot of money in here,” said the founder of Appaloosa Management (assets: $13 billion, as of year-end 2019), in remarks that some analysts contended helped pull down stocks for the day. “There’s been different misallocation of capital in the markets. Certainly, you are seeing pockets of that now in the stock market. The market is by anybody’s standard pretty full.”
The S&P 500 lost 1.75% Wednesday, hitting a three-week low, also surely owing to Federal Reserve Chairman Jerome Powell’s comments that the odds of a lasting economic slump may worsen without more government relief spending.
Appearing in a mid-day CNBC program, Tepper said we are in “maybe the second-most overvalued stock market I’ve ever seen. I would say ’99 was more overvalued.”
The S&P 500 is trading at a trailing price/earnings (P/E) ratio of 22, in line with where it has mainly been over the past four years amid history’s longest bull run. In 1999, the average P/E was 33. This year, after the market skidded in February and March, it has retraced a lot of its losses and now sits at 13% below the Feb. 19 high.
Unimpressed, Tepper contended that the recent rally doesn’t necessarily have the momentum to keep going—and escape another dive, although he doubted it would go below the February low point. “There might have been a bottom put in … but that doesn’t mean you can’t fall significantly from these levels,” he said.
Taking on the big tech names that have driven the market higher, Tepper labeled some of the values on Nasdaq “nuts.” One high-flying name he cited as an exception, despite its 112 P/E, was Amazon. He called the online retailer, whose revenue skyrocketed 26% in the first quarter (versus the year-ago period), “perfectly positioned.”
Tepper, who said he is just 10% to 15% long on equities, is eyeing transforming his hedge fund firm into a family office. That would give him more time for other pursuits, such as his ownership of football’s Carolina Panthers.
His thoughts carry a lot of weight on Wall Street and his public pronouncements often have a role in moving the market. After Wednesday’s TV appearance, stocks started to dip. He won fame for, among other things, the canny play he made in 2009, through bargain-buying of beaten-up financial stocks, such as Bank of America, then going for $3 a share. Appaloosa cleaned up, making $7 billion when financial firms recovered from their 2008 near-death experience.