(Bloomberg) – Bill Harnisch is on a roll. Assets in his Peconic Partners hedge fund are swelling on near-perfect market timing that included last year’s bear market short and long swing just as the tide turned.
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So when he says the party is over, that’s a point to consider.
Up 35% this year after jumping 26% in 2022, Peconic sits with $1.5 billion in assets and a growing belief that the tech rally that helped fuel the final leg has seen its best days. . The New York-based fund recently sold all of its shares in Alphabet Inc. and Amazon.com Inc. — names that made up more than 10% of its holdings — and is bracing for a stock downturn after adding 9,000 billions of dollars. values in nine months.
“We entered a no man’s land because it didn’t fall apart and it didn’t fall apart,” Harnisch, who started in the financial industry in 1968, said in an interview. “I can’t sit here and tell you that I wasn’t surprised at how well the market performed, given that interest rates didn’t come down. But I find it hard to see where the big engine of growth is in the future.
As the S&P 500 dances around 4,500, the top of its forecast range for the next one to two years, the former Chase Manhattan Bank analyst concedes the market could overshoot the upside, especially if the Optimism about artificial intelligence and the end of Federal Reserve tightening continues to grow. But after a 26% rally, he says, the market has yet to prove itself at this altitude, which is still below the high reached in early 2022.
The veteran sees a host of potential headwinds, from sticky inflation to earnings disappointment and stretched valuations. In his view, the chance for the S&P 500 to retest 3,500, its October low, is not frivolous.
According to Harnisch, companies like Alphabet are doing business as if AI could revolutionize the way people live and work overnight. But innovations like theirs existed long before Microsoft Corp’s $10 billion investment. in OpenAI, owner of new AI tool ChatGPT, and even pioneer Alphabet proceeded with caution.
“Everyone jumped when they saw that Microsoft was going to take AI seriously – it’s going to change the world, so grab a ticket and get on board.” Harnisch said. “It’s real, it’s big, but it’s going to be long.”
His caution stands out at a time when the bulls are consolidating their hold on the market. That comes from a manager who rose 60% annually in the three years to June, four times the S&P 500.
Admittedly, Harnisch’s view of the market was far from unrestrained positive at the start of the year, with predictions that the S&P 500 would trade in a range as 2023 unfolded. Now that stocks have reached the top of this band, it is slowing down, limiting leverage and diversifying away from technology.
Peconic, which started in 2004, has a dozen people who focus on determining which companies will grow faster than the economy in the long run. Picks, the core of its portfolios, are typically held for seven to eight years. On the short side, the team builds hedges to offset the risk of core holdings while looking for mispriced stocks.
The team recently added MasTec Inc., a construction company, broadening a selection of industry holdings that stand to benefit from growing demand for high-speed internet, clean energy and artificial intelligence infrastructure, areas in which the government plans to increase spending and reduce regulatory bottlenecks. .
MasTec shares gained 25% in the second quarter. Two of the fund’s largest holdings – powerline builder Quanta Services Inc. and Wesco International Inc., an electrical equipment distributor – have risen 39% and 42% respectively since the start of the year.
In total, Peconic’s net leverage – a measure of risk appetite that considers long versus short positions – currently sits at 32%. That’s about the middle of a three-year range and down from the 2023 high of 45%.
Now Harnisch is grappling with a market he calls “full price.” The S&P 500 is valued at about 19 times expected earnings for next year, an estimate that Bloomberg Intelligence says is near $240 per share and represents an 11% increase. Although the portfolio manager does not expect an economic recession, such a rapid rebound in corporate earnings seems overly optimistic.
The path of interest rates, which he expects to stay higher for longer, adds pressure on equities multiples as inflation, despite a year-long downtrend, is expected to stay above of the Fed’s 2% target, underlined by persistent wage pressure and a rebound in oil. prices.
That said, equities defied warnings of gloom all year and remained buoyant. Since early March, the S&P 500 has managed to avoid a weekly decline of 2%, the longest streak of resilience in nearly two years.
Harnisch says his company will closely watch the second-quarter earnings season, in full swing in the coming weeks, for any pattern shifts in everything from consumer spending to wage pressure and growth in China.
“We’re just waiting to see how the news comes in,” he said. “Like people say, we’ll watch and see how the cards come out of play.”
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