How the world's biggest investors are feeling about markets

It seems that a strong performance from US equities so far this year, with the S&P 500 up circa 16% year to date and the tech-heavy Nasdaq up almost 40%, has prompted some heavy-hitting investors to dial back their risk levels.

The strong performance from markets, coupled with the fact that most pundits believe that the US economy is still headed towards recession, has seen sentiment change in recent months.

The S&P 500 is on track for its worst two-month decline in a year, inflation remains above central bank targets, and the household savings that had kept the economy afloat to this point have eroded.

So, what have some of the world's most well-known investors been doing and saying?

#1 Ray Dalio

They don’t come much bigger than Ray Dalio, founder and former chief investment officer of one of the world’s largest hedge funds, Bridgewater Associates, which looks after almost US$200 billion in assets.

When asked about how he deploy capital in today’s environment, Dalio said that he would prefer to hold cash right now.

“Temporarily, right now, cash I think is good … and the interest rates are fine. I don’t think [it] will be sustained that way,” Dalio told an audience at the Milken Institute Asia Summit in Singapore on Thursday.

Dalio went on to say that the biggest mistake investors can make right now is “believing that markets that performed well are good investments, rather than more expensive”.

Whilst Dalio is not particularly bullish right now, he did have some advice for finding investments in general, namely to be in the right geographies, pay attention to the impacts of disruption, pick assets classes creating new technologies and diversify.

#2 Cathie Wood

Cathie Wood was made famous by the performance of the ARK Innovation Fund that she runs which returned 152% in 2020, but has since lost 23% in 2021 and 67% in 2022.

Wood still makes headlines however, and she has recently been dumping Tesla stock – a company which helped make her famous with the performance in 2020, when it went up around 8x from $90 to north of $700 (before the split).

More recently, Wood has been backing away from this bet, hitting the sell button on Tesla 13 times in row since 26 April. Over those 12 transactions, Wood has sold almost 730,000 units of Tesla.

#3 Ken Griffin

Griffin runs Citadel, another hedge fund behemoth that looks after US$62 billion in assets.

Appearing on CNBC’s ‘Squawk on the Street’ recently, Griffin said that he’s “a bit anxious that this rally can continue”.

He went on to add that one of the big drivers of the rally has been “the frenzy over generative AI, which has powered many big tech stocks”. Whilst he wants to believe the rally has legs, he’s worried “we're in the seventh or eighth innings".

#4 Jeremy Grantham

The concerns about the rally being fuelled by just a handful of stocks riding the AI narrative was shared with veteran investor Jeremy Grantham at Livewire Live.

At the event, Grantham said;

A dozen giant American stocks have had a hell of a run on the back of AI, and that has certainly created the impression that it's game over".

"The problem is prices are incredibly high and basically the economy is beginning to unravel," the co-founder of asset manager GMO added.

GMO has around US$61 billion of funds under management.

#5 Mike Wilson, Morgan Stanley

Stock picking guru (and notable bear) Mike Wilson has not minced his words when talking about the US economy in a recent note:

We can’t help but remain sceptical that economic growth is accelerating.

He went on to add that the S&P 500 risk/reward today is one of the worst he’s ever seen, “given the earnings setup that we see in front of us combined with the valuation that we have today".

Perhaps most telling was his comments around recent sharemarket gains and how investors should be viewing them:

“The rally in some of the major averages over the last few weeks may have investors feeling a bit better again, but given the underlying weakness in breadth and in some of the more cyclical parts of the market, we think that optimism should be faded.”

Wilson went on to point out that there is a risk of softer economic data coming in September and October, that has not yet been priced into expectations.

The cracks are forming," he said. "They're all over the place, which is why people are cramming into a handful of stocks.

#6 The investment banks

Other investment banks have been sounding cautious alarms too.

JP Morgan recently said the following:

"US earnings are contracting, and consensus expectations for next year appear too optimistic given an aging business cycle with very restrictive monetary policy, rising cost of capital, lapping of very easy fiscal policy, eroding consumer savings and household liquidity, and elevated risk of a recession," strategists wrote in a recent research note.

Whilst Bank of America Merrill Lynch added this in its note:

"Lately, investors have been responding positively to data that suggests the economy is weakening. Central to this "bad news is good news" dynamic is a belief that a softening economy will lead to cooling inflation, which will be met by easier central bank policy and lower interest rates In our view, this trend won't last forever," strategists at the bank said in a note seen by Insider.

Our base case is for a choppy, grind-it-out market environment to persist for the remainder of the year. Against this backdrop, from an investment perspective, we continue to favour a disciplined approach that emphasises diversification across asset classes”.

Conclusion

Whilst it’s not panic stations, it pays to know what the big money is doing and there is clearly sentiment is shifting in the US ahead of what many believe will be a tougher period for the economy and financial markets. 

This article was originally published for Livewire Markets on Monday, 18 September 2023.