Carl Icahn, Jeremy Grantham, and Doug Kass are the latest to warn of risks to the market at these record levels. Are they right?
It was the warning that shook the market. But, were recent statements by Carl Icahn – and other large investors – that stocks were due for a correction just a false alarm?
Speaking at a conference on Monday, the billionaire investor warned that the markets could face a "big drop". Those comments helped to knock the S&P 500 and the Dow Jones Industrial Average from its record peaks earlier in the trading day.
Icahn's reasoning is in part based on the fundamentals. He believes earnings for a lot of companies are a "mirage", with poorly-run companies showing positive results thanks to low US interest rates.
Not surprisingly, noted bear and hedge fund manager Doug Kass, president of Seabreeze Partners, agrees with Icahn. "It is only the cyclical (and elevated) position of profit margins that prevents recognition that equities are richly valued," writes Kass in his most recent note titled "I agree with Icahn".
Taking a more nuanced view is Jeremy Grantham, co-founder and Chief Investment Strategist at Grantham Mayo Van Otterloo (GMO), which manages $110 billion. Grantham believes the market will continue to move higher before "we will have the third in the series of serious market busts since 1999."
And, of course, there were recent comments by both Pimco's Bill Gross and BlackRock's Larry Fink using the term "bubbly" to describe the current market condition.
"It's really difficult for anyone – anyone – to pick a market top," says CNBC contributor Andrew Busch, editor and publisher of The Busch Update. "I always go back to Grenspan in '96 talking about 'irrational exuberance' and then the NASDAQ going to 5,000 in '99."
The key for the future of the markets, says Busch, is next year's US Gross Domestic Product.
"Tell me what GDP is going to be in 2014 and I'll tell you whether the stock market is overvalued," says Busch. "If GDP is less than 2%, then absolutely we're overvalued at these levels. If GDP is above 2.75% or 3%, then, no, we have further to run."
In 2012, GDP growth was at 2.79%. In the third quarter of 2013, it was up at an annualized 2.84%.
"I'm more optimistic about 2014, so I think the market has more room to run on the upside," says Busch.
Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson agrees with Busch. And, Ross also agrees with Jeremy Grantham.
"Mr. Grantham also stated that there could be as much as 20% to 30% upside before we get a decline of that magnitude (up to 40%)," says Ross. "That's what I love about Jeremy Grantham. That's what makes him one of the best. Even though he's a true value investor steeped in the fundamentals, he respects the technicals."
"He knows that price and value are two very different things," says Ross, who anticipates an upside in the Dow Jones Industrial Average in the near future.
To see Ross' take on the Dow's technicals and to see the rest of Busch's fundamental analysis on the markets, watch the video above.