Stock Rally Is a Bear-Market Trap, Top-Ranked Fund Managers Say

Despite enduring a brutal start to the year for their portfolios thanks to a surprise market rally, two top-ranked fund managers are sticking to the bearish views that made them winners in the 2022 stock crash.

Jeff Muhlenkamp, whose Muhlenkamp Fund delivered a positive return last year, says elevated interest rates will continue to sow market havoc even though it’s likely that the Federal Reserve will engineer a soft landing. Moreover, there is a risk that the aggressive policy tightening ends with a recession, with a worst-case scenario that the S&P 500 drops a whopping 30% from Thursday’s close. His fund currently holds more than one third of its money in cash.

Muhlenkamp’s skeptical peer James Abate also sees the equity rally as nothing more than a bear-market trap. His Centre American Select Equity Fund, which beat 96% of peers in 2022 according to data compiled by Bloomberg, put on new hedges via put options in recent weeks. A four-month advance has pushed the S&P 500’s price-earnings ratio above its 10-year average at a time when corporate America’s profit machine is weakening.

“I have difficulty in seeing how the market can move materially higher in this environment,” said Abate, aged 57. “You have an asymmetrical market where you get limited gains from P/E expansion if all goes well and you get significant declines if indeed a recession does take hold.”

Their skepticism echoes a large swath of Wall Street pros who resist embracing an advance that has lifted the US benchmark as much as 17% from its October low. While bears have been forced to unwind short positions, there are signs that few are willing to chase gains.