Bill Harnisch, whose $1.5 billion hedge fund delivered a market-beating 31% gain last year, is betting the recent bout of euphoric stock buying will peter out.
In the final days of December, the manager of the Peconic Partners increased wagers against the SPDR S&P 500 ETF Trust, while loading up short positions in expensive industrial stocks and shares of consumer-product makers that have raised prices aggressively. Meanwhile, the fund trimmed holdings in Amazon.com Inc., a big winner of the 2023 bull run.
As a result, the fund’s net leverage — a measure of risk appetite that takes into account the long versus short positions — dropped to 33% from a peak of 50% in a matter of weeks. It has fallen further into the new year, with the ratio sitting at 30% as of Wednesday’s close.
It’s not that Harnisch suddenly sees trouble ahead. In fact, the fundamental backdrop is benign with inflation cooling and the Federal Reserve “at or near” its monetary tightening cycle. Growth will slow this year, but the market veteran expects the economy to avoid a recession.
What worries him is this drastic spurt of optimism, driven by hopes that the central bank will embark on a monetary-easing cycle as soon as March. In his view, inflation will likely hover near 3%, a level that’s still above the Fed’s 2% target and would require restrictive policy to continue.
“The same people that were worried about inflation suddenly turned positive. It was like, boy, somebody turned the lights on and away we went,” Harnisch, who started in the financial industry at Chase Manhattan Bank in 1968, said in an interview. “What’s going to make the market happy here in the meantime?” he asked. “We may need to rest a little bit.”
Bill Harnisch
There are signs that the rousing year-end rally is showing signs of fatigue. Down 1.7%, the S&P 500 is poised to snap a nine-week winning streak that was the longest in two decades. The benchmark index returned 26% last year including reinvested dividends, as investors chased gains, paying up for stocks despite a drop in corporate earnings.
Peconic’s record stood out in a year when many money managers were left behind during the shocking rally. Among large-cap mutual funds, only 38% were ahead of the market, the worst industry performance since the 2020 pandemic, data compiled by Bank of America Corp. show. Long-short hedge funds didn’t fare well either, with a Bloomberg index tracking the group climbing a meager 4% in the first 11 months.
For a fourth straight year, the New York-based fund beat the market. Over the stretch, it’s up 38% annually, three times as much as the S&P 500.
Harnisch, who started Peconic in 2004, envisions subdued upside in 2024, with the S&P 500 rising 10% at most at its peak. While profits are expected to recover, valuations particularly for stretched tech stocks will be under pressure from bond yields. At the same time, the downside risk will likely be limited, too, unless inflation picks up, he says.
“I just don’t see it running very hard to the upside,” he said. “It could be a range bound year.”
The lack of enthusiasm echoes Wall Street strategists, whose average year-end target for the S&P 500 calls for a 1.3% gain from December’s close. That’s the least bullish year-ahead outlook since Bloomberg began tracking the data in 1999.
Peconic focuses on discovering companies that will expand faster than the economy in the long run. The picks, the kernel of its portfolios, are usually held for seven to eight years. On the short side, the team builds hedges to offset the risk from the core holdings while looking for mispriced shares.
Convinced in sustainable demand for high-speed internet and clean energy, the fund last year held on to two of its largest holdings — power-line builder Quanta Services Inc. and Wesco International Inc., a distributor of electrical gear. Both stocks returned at least 40%.
Recently, Peconic bought shares in steel producer Cleveland-Cliffs Inc., while adding short positions in Ford Motor Co., an automaker, and Starbucks Corp., a coffee chain.
The rising dominance of passive investing is creating opportunities for stock pickers, according to Harnisch. The proliferation of exchange-traded funds has pushed the share of passive vehicles in the asset management industry to 53%, according to data compiled by BofA. That’s up from roughly 20% some 15 years ago.
“If you have passive money buying an index, that treats every company equally. There are going to be stocks within that index that are overvalued and some are going to be undervalued,” he said. “I don’t understand why people think that stock picking is over.”
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