Billionaire hedge fund manager David Tepper is "leaning short" on the stock market heading into 2023 for the same reason that stocks performed so well in the aftermath of the Great Financial Crisis in 2009: don't fight the Fed."Sometimes they just tell you what they are going to do and you've got to believe them. And I kind of believe them," Tepper told CNBC on Thursday, referring to the Fed.The Federal Reserve has raised interest rates by more than 400 basis points so far this year in an attempt to squash 40-year high inflation. Last week, Fed Chairman Jerome Powell hiked rates by 50 basis points and indicated that the Fed Funds rate will rise another 75 basis points to about 5.1% by the end of next year."[The] Fed terminal rate will likely reach a peak of 5.25% and they're going to keep rates high for a while," Tepper said.
That's because while inflation has no doubt fallen since its annualized peak at 9.1% in June, there's still a lot more to do if the Fed is going to get inflation down to its 2% target. "Central banks are nervous about inflation staying persistently at 4%, and they're getting ahead of that with their continued tightening," Tepper explained.It's not just the Fed's raising interest rates poses a threat to the stock market. It's also its balance sheet reduction plans, as it reduces its massive $8.6 trillion balance sheet by $95 billion per month. With the Fed shifting to selling bonds rather than buying them, that sucks liquidity out of markets, and stocks love liquidity.And what's more, Tepper highlighted, is it's not just the US Fed getting tight with its monetary policy, but central banks around the world.
The Bank of England and the European Central Bank are both in tightening mode with the projection that they will continue to hike interest rates next year."I got everybody tightening and telling me they're going to tighten more, and I got markets that just don't believe it," Tepper said. "We don't have coordinated tightening around the whole world with everybody tightening at the same time too often." Tepper said that higher interest rates also mean tough competition for other assets, like stocks, given that an investor can collect an attractive risk-free return of about 4%-5%, and that return rate is likely to go higher next year if the Fed continues with its hikes. "I hate when I have coordinated tightening. We have coordinated tightening.
I got three other central banks telling me they're going to do more," Tepper said. According to data from Bank of America, central banks around the world have raised interest rates nearly 300 times this year."They're not happy to have asset inflation here. What am I supposed to do, fight them?" Tepper said.
And that's exactly why Tepper is not particularly optimistic about the stock market in 2023."I'm leaning short on the equity markets, because I think the upside/downside doesn't make sense to me when I have so many central banks telling me what they're going to do, what they want to do, and what they expect to do," Tepper said. "This is going to be a tough level to talk about robust returns in the next year, particularly when you have the Feds in such a tightening mode."