CNN Business: The Case for Why 2019 Will be a Bad Year for Markets and 2020 Will be Even Worse

February 13, 2019

Article by Matt Egan in CNN Business

Hedge fund manager Mark Yusko sees eerie similarities between today and the implosion of the dot-com bubble.

In late 2000, US stocks plummeted as investors fled overvalued technology stocks. But Wall Street rebounded in January 2001, leading many to conclude the worst was over. It wasn't.

"We are experiencing tech wreck 2.0," Yusko, the founder and CEO of Morgan Creek Capital Management, told CNN Business last week from the sidelines of the Cayman Alternative Investment Summit.

"We're definitely in a bear market. It started on September 21 of last year," Yusko said, referring to the day the S&P 500 last hit a record high.

US stocks, as measured by the S&P 500, plummeted nearly 20% between last fall and Christmas Eve. That's just shy of what typically qualifies for a bear market.

Vicious cycle?

But Yusko doesn't think that matters. He believes the stock market is way too expensive and it will ultimately plunge at least 40% to 50% from all-time highs.

"Amazon is a bubble. The stock is wildly overvalued. Netflix is even worse," he said.

One crucial difference between now and the dot-com bubble is most of today's popular tech stocks are profitable. Back then, many money-losing companies were trading on ill-defined metrics like eyeballs.

Another contrast is the rise of passive investing. Over the past decade, a flood of money poured into cheap ETFs that blindly track indexes. That's been a big boost during boomtimes but can backfire when investors all hit the exits at once.

"There is this virtuous cycle that pushes everything to extremes," said Yusko. "Once that cycle turns, it becomes vicious. Selling begets selling."

Markets have raced back to life

Investors have piled back into tech stocks in 2019. Fears of an imminent recession have been eased by strong economic reports, progress in resolving the US-China trade war and a suddenly dovish Federal Reserve.

The Dow soared nearly 400 points on Tuesday, finishing at two-month highs, as Congress and the White House neared a deal to avert a government shutdown.

'Zombie companies'

Nonetheless, Yusko urged investors not to be distracted by the hot start to 2019. He believes the rally will end in tears, predicting the S&P 500 will finish with a decline of around 13% to 14% on the year.

"It's like a rubber ball bouncing down a set of stairs. Each bounce is higher. But the end of the trip is a bad place," Yusko said.

And just like how 2002 was the most painful year during the bursting of the dotcom bubble (the S&P 500 plunged 23% that year), Yusko sees 2020 as the big down year during this cycle. He pointed to a wall of debt coming due around 2020.

"All these zombie companies are being propped up with free money," Yusko said.

Global central banks will try to come to the rescue, as they did during the 2008 financial crisis. But Yusko doesn't believe the Fed and its foreign counterparts have enough ammo this time. Interest rates remain very low and central bank balance sheets are still bloated.

"The cupboard is bare," Yusko said.

To read this article in CNN Business in its entirety, click here.

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