Many investors may not realize it, but the stock market has quietly transitioned into a bear market, according to a group of long-short managers.
“What’s actually happening now is that 10 stocks have driven the S&P higher,” said David Lundgren, founder and chief market strategist of MOTR Capital Management & Research in Marblehead, Mass. He was among three investment managers who discussed the market during a panel discussion at the Inside Alternatives webinar hosted by Financial Advisor magazine.
“But the average stock is actually down year-to-date,” he continued. “Half of the market is below where it was at the bottom of the banking crisis.”
But for prudent investors, he said, this bear market represents opportunities.
The discussion was titled “A New Playing Field for Long-Short Hedge Funds,” and all three panel members were long-short managers. Moderated by Financial Advisor magazine’s editor-in-chief, Evan Simonoff, the conversation circled around what exactly some of the current market opportunities might be.
“For the past 15 years, the interest rate environment was very favorable for long-duration assets, including everything from bonds to growth stocks,” Simonoff began. “This challenged many value strategies and many alternative strategies. … But 18 months ago, everything changed.”
Ali Motamed, founder and managing partner of Invenomic Capital Management in Boston, agreed. There are new opportunities, he said—“unique opportunities to participate in and buy certain instruments that we never thought we’d have a chance to, at yields that are much higher than we anticipated.”
Yet he acknowledged that his firm is “looking at balance sheets more carefully” these days, just to make sure that the companies his firm holds long positions in will still be around after the recession.
Tom Hayes, the founder, chairman, and managing member of Great Hill Capital in New York City, said he’s undeterred by the bear market or overall trends. He is fundamentally a contrarian.
“We like to buy straw hats in the winter,” is how he put it.
Whatever the macro environment presents, he explained, is almost “immaterial” to his investment philosophy. “We try to spend less time on macro and more time on buying durable, sustainable cash flows when they are temporarily out of favor,” he said. “We profit from periods of dislocation.”
Later, Simonoff asked the panel specifically about the housing market, given the rise in mortgage rates and pent-up demand from millennials.
Lundgren called housing “a very decent area of the market,” but he added a note of caution. “I’m not a trend following, momentum investor,” he said. “What I’m always looking for are fundamental narratives that just aren’t playing out. … You want to focus on those areas of the market that are doing better than they should be doing, given their data profile.”
Such seeming paradoxes often indicate which sectors are most likely to flourish when the bear market is over, he said.
We are “very much in a bear market.” he said. He noted that the average stock is “fully engaged with the uncertain, volatile macro environment we’re in right now,” he said. “The average stock isn’t doing much of anything.”
Hayes predicted that housing demand will “come roaring back” when interest rates fall, which could be 20 months or more away. “But I like to find things that are leaving the station, not those that have already left.”
That coming housing market may look more like the 1950s, he said, than the mansion boom of more recent decades. Young families simply want an affordable place to raise kids. There isn’t yet enough supply of small family housing, he said, but that scarcity only represents an opportunity. The supply will come, he insisted.
“Now, with technology, those homes can be built a little further and further out from the city, because people don’t have to be in [the office] every single day,” he added.
To close, Simonoff read a question from the audience. “Can you describe the amount of your portfolio’s net exposure, long or short, and what would cause you to change that?”
The panelists answered cautiously. “It varies by the day,” said Motamed, “though not by more than a tiny bit.”
He allowed that his current portfolio is about 17% or 18% net long, and he does not run net short. “We’re probably a little less optimistic than others,” he said.
