- Mark Yusko, the CEO and chief investment officer at Morgan Creek Capital Management, thinks the stock market is inching towards disaster.
- His forecast rests upon several variables including a highly concentrated market, stretched valuations, piles of corporate debt, a Federal Reserve that’s running out of ammo, IPO exuberance, and unrestrained investor sentiment.
- Yusko says “debt is the only thing that’s supporting” stocks, and thinks it will play a principal role in the impending unwind.
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“Could we get a repeat of 1930, 31? Yup, I think we could.”
That’s what Mark Yusko, the CEO and chief investment officer at Morgan Creek Capital Management, said in a recent webinar, comparing today’s stock market environment to that of the Great Depression. For the uninitiated, the 1930-1931 time period that Yusko references coincided with a nearly 70% plunge in the Dow Jones Industrial Average.
“Bottom line is: The S&P is a money supply story,” said Yusko, whose firm manages close to $2 billion in assets. “We basically increased the money supply; that got stocks to go up, but now money supply growth can’t grow as fast as it was — that’s just math. The rate of change is not as high, and the Fed’s got to lower their balance sheet at some point.”
For context, here’s a look at the explosive increase in the M2 money supply, which has been fueled by recent changes in Federal Reserve policy. Much like today, in the years leading up to the Great Depression, the Federal Reserve implemented stimulative policies. Those policies helped stimulate an asset bubble that would soon collapse.
But that’s not where Yusko’s worries end. Far from it. Before the market’s pandemic-induced crash and its subsequent comeback, Yusko called for a lost decade for stocks.
He now strings together his ominous forecast with an array of adversarial variables, including a highly concentrated stock market — one in which just a handful of stocks make up about 20% of the entire S&P 500 index — waning earnings, piles of corporate debt, sky-high valuations, IPO exuberance, and unrestrained investor sentiment.
Of the bunch, one variable in particular really irks Yusko.
“The biggest problem, though, for stocks, is debt,” he said. “Debt is the only thing that’s supporting.”
Yusko notes that corporate earnings as of late have been flat to negative, buoyed primarily by increases in leverage.
Here’s a look at the rise in the corporate-debt load, which has been powered in recent years by historically low borrowing costs. It’s an important aspect of Yusko’s big-picture outlook that we’ll revisit a little later on.