The largest hedge fund manager in the world is convinced the market is not a bubble about to burst.
“We think asset prices are high and, as a result, the future expected returns of passive investing are likely to be low. But … we do not see current conditions as a bubble,” Greg Jensen and Jacob Kline of Bridgewater Associates wrote in a private note to clients on May 1 obtained by CNBC.com.
Jensen is co-chief investment officer of Bridgewater along with founder Ray Dalio and Bob Prince. The Westport, Connecticut-based firm manages $169 billion for institutional clients like pensions and endowments and its economic views are widely followed and respected.
Factors arguing against a bubble are, according to the authors:
- Prices have increased quickly, but not as fast as other bubbles
- Valuations are still in “normal territory”
- Leverage isn’t a major driving force of prices and overall lending is still “modest”
- There aren’t any significant new investors entering the market
- U.S. retail and foreign investors have “modest” positions
- Corporate stock buybacks are sustainable
- Economic sentiment is “less ebullient” than other bubble periods
In short, Bridgewater doesn’t think the situation today is analogous to the Roaring ’20s, the dotcom boom of the late 1990s or the housing-fueled bubble of the mid-to-late-2000s.
The letter does note “frothy” bullish sentiment and says there are “pockets of froth” in high-yield bonds and commercial real estate. But even those “aren’t of a magnitude that amount to a bubble.”
“Assets not being in a bubble doesn’t mean they can’t decline and aren’t vulnerable to surprises, but it does make a cascading pop in asset prices much less likely,” the authors added.
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