It was China's woes and uncertainty over the timing of Federal Reserve interest rate hikes that set off the 11 percent drop in the S&P 500 index between Aug. 17 and Aug. 25, right?
Not exactly, says star hedge fund manager Lee Cooperman, founder of Omega Advisors. In a Sept. 1 letter to investors, he wrote that fundamentals alone "cannot fully explain the magnitude and velocity of the decline in equity markets last month," the Financial Times reports
He puts some of the blame on "systemic/technical investors," including risk parity funds that allocate investments between stocks, bonds and commodities, and commodity trading advisers' funds, which invest like hedge funds.
Some agree with Cooperman. "These technical factors can push the market away from fundamentals," Marko Kolanovic, a senior JPMorgan Chase strategist, said in a report obtained by the FT.
Omega's stock funds plunged 9-11 percent in August and are down between 6-11 percent so far this year, the letter states.
To be sure, while technical factors can drive markets for short periods, in the long term, fundamentals win out. So if you are investing on the basis of solid research, you don't necessarily have to sell when a holding takes a sudden dive.
Meanwhile, another star hedge fund manager, Doug Kass, president of Seabreeze Partners Management, sees more trouble ahead for the stock market. “I think that the spike in volatility that we’ve seen in the last 10 days is the precursor to further spikes,” he told The New York Times
The CBOE Volatility Index
has soared 71 percent since Aug. 19 to 26.09.
Meanwhile, “the fundamentals around the world are still wobbly, and valuations are still elevated,” Kass said. The Atlanta Fed's forecasting model puts third-quarter U.S. economic growth at just 1.3 percent. And negative economic news is streaming out of China, the eurozone and Japan.
As for valuations, the trailing price-earnings ratio for the S&P 500 index totaled 20.69 Friday, up from 19.19 a year ago, according to Birinyi Associates.
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