Investors were driven into “buy the dip” strategies
Jeff Gundlach is also concerned about the impending recession
The year 2021 was quite a successful one for stock market investors. Germany’s leading index, the DAX, was up 15.8 percent, while the TecDAX was up significantly again at +22 percent. Stock investors abroad were also in a buying mood in the old year: At the end of the year, the S&P 500 was almost 27 percent above its starting value from January, while the Dow Jones and Nasdaq improved by almost 19 and more than 21 percent. And a look at the MSCI World, which tracks the price development of 1,600 stocks from 23 industrialized countries and increased by around a third in 2021, shows that investors were definitely in a buying mood in the old year.
Strategist warns against overvaluation
But not all experts share the optimism on the stock market. Critical voices expressing concern about the ongoing bullish mood on the market are becoming more and more frequent. One of these belongs to Lenore Hawkins, who serves as chief strategist at Tematica Research. Speaking to Yahoo Finance Live, she took a close look at current developments on the stock market. “We’ve never seen stocks valued so highly. The adjusted price-to-earnings ratio is up 40 times. The last time we saw that was in 1999. But if you look at the price-to-sales multiple , that’s more than triple – that’s higher than what we saw in the dot-com bubble,” she said.
She believes stocks are “massively overvalued,” suggesting that investors are more likely to invest in momentum trades than do their fundamental homework, she said.
Investors “trained” to buy on pullbacks
When asked if investors were currently trading irrationally, Hawkins replied, “I think investors are trading quite irrationally, the way the Fed and the market have trained them to be.” Investors who had not used price setbacks to buy in the last ten years were “killed”.
Investors learned that lesson and pursued “buy the dip” strategies that revolved primarily around growth and tech stocks. Some of them would not have made sense from a fundamental point of view, the expert continued. Although she does recognize the great opportunities that are arising in the tech industry, Hawkins nevertheless referred in the interview to the deflationary dangers in particular.
2022 will be all about risks related to the recession, after 2021 inflation was the main theme in the stock markets.
Gundlach also sees a risk of recession
Jeff Gundlach, who became known as the bond king, also supports this argument and warned of an impending recession that the US Federal Reserve would trigger with its planned tightening of monetary policy.
“Valuations have been this extreme before, but it usually hasn’t ended well,” the billionaire told Yahoo Finance. “Now the Fed is in reverse gear” after two years of being in reverse. If the Federal Reserve were to raise interest rates and reduce its bond holdings, it could weigh on stock prices and plunge the economy into a recession, Gundlach warns.
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