KUALA LUMPUR (June 12): An American investment manager and Wall Street veteran has said that the stock market’s leaders are overvalued and could suffer a big correction, reported Business Insider.
Citing Richard Bernstein Advisors chief investment officer Richard Bernstein on Wednesday, the American financial/business news website said he predicted losses could rival the dot-com crash, when popular stocks lost as much as 50% of their value.
It added that Bernstein pointed to a discrepancy between the debt and equity markets, which could hint at a soon-to-come market correction.
In the debt market, credit spreads are narrowing, which is what typically happens when corporate profits are growing.
But, only a narrow group of stocks are dominating the equity market, which implies that profits aren’t expanding for most companies.
Bernstein said there are a number of things that could explain that disconnect.
“The bond market could be flashing a false signal, which would imply that there could be a credit event and a wave of corporate bankruptcies on the horizon,” Bernstein said.
However, he said the more likely explanation is that the most expensive stocks on the market are way overvalued and are headed for a correction, while the bond market signals rising strength for the rest of the companies that make up the S&P 500.
“Fundamentally, it makes zero sense. The bond market is saying corporate profits are going to be strong … but the equity market with this incredibly narrow leadership of seven companies is saying that it’s an apocalyptic earnings outlook,” he told Business Insider in an interview.
“I think the stock market’s in a bubble and the bond market is right,” he said.
While Bernstein didn’t have a prediction for when the bubble might burst, he warned that it could inflict serious “damage” on the economy, with equity losses that rival the dot-com crash.
After the boom in internet stocks, the Nasdaq Composite dropped 78% from its peak, and tech stocks continued to struggle over the next 14 years.
That paved the way for a “lost decade” in the stock market, with the S&P 500 losing 1% from 1999 to 2009.
“That’s what I think we’re looking at,” Bernstein warned. “It’s multiple years of significant underperformance.”