U.S. stocks went on a tear in May, bringing the S&P 500 and Dow Transports to record highs while the Nasdaq recouped much of the losses suffered in March and April. The May rally surprised many traders and caught market skeptics by surprise, yet again.
“Simply put, we’ve been wrong...badly...to have expected the market to correct,” veteran trader and newsletter writer Dennis Gartman wrote Tuesday.
Henry Blodget, another noted skeptic, remains convinced stocks are heading for a fall, if not an outright crash of 30% to 50% as he predicted earlier this year.
"I'm still very skeptical," he says in the accompanying video. "The higher it goes the more worried and skeptical I get."
As has been the case for several months now, Blodget is concerned about valuations as measured by Robert Shiller's cyclically adjusted P/E ratio (CAPE), as well as metrics such as market cap-to-GDP and corporate profit margins, which are near all-time highs.
Today, he also mentioned concern about the Fed starting to tighten monetary policy. "In the past, over time, that has often triggered sharp market pullbacks," Blodget says. "I am increasingly worried, yes, we're going to get a sharp and startling pullback."
While, yes, the market could "crash" from current levels with little or no notice, I would argue the Fed isn't so much tightening policy as taking its foot off the accelerator. Plus, Fed Chair Janet Yellen has made it clear she'll put the pedal to the metal if the economy starts to worsen again, as recent data on first-quarter GDP and April consumer spending suggest may be the case.
In addition, I note stocks are less expensive relative to Treasuries, referencing Citigroup's Tobias Levkovich who says Shiller's CAPE is flawed because it doesn't account for "normalized" rates over 10 years as it does for corporate earnings.
But Blodget is unbowed and unmoved from his position that stocks are dangerous -- for the long term.
"My position is based on valuation, which is not a timing tool; in fact, the market has been expensive on measures I"m looking at for many years," he says. "But in the past [these valuation measures] enabled you to get a good sense of your likely future return. Right now the 10-year return on the S&P 500 is about 2% to 2.5% per year. That's not terrible, that's why I'm not selling stocks, but it's very low relative to normal expected returns."
Indeed, Blodget remains long stocks, despite his concerns: "I own a boatload of stock and want nothing more than for this market to go to the moon from here," he says.
In the end, timing is everything: Based on Shiller's work, stocks are set up for lackluster long-term returns from here -- unless "it's different this time."
But as Levkovich notes, scant few professional investors have a time horizon much beyond the next year, or two at the most. "In the long run, we're all dead," John Maynard Keynes once said. And on Wall Street, you're often dead in the short-to-medium run if you're caught betting against or sitting out a rally.
The key here is to sync your risk tolerance to your time horizon and not suffer from "performance anxiety," which is much easier said vs. done for professional and retail investors alike.