DAN LOEB: This is a 'Wall Street recession'

The 2016 market so far has been brutal for Wall Street, with global stock indices getting slammed as oil prices have continued to fall.

Here’s a quick scorecard year-to-date (through February 16):

  • S&P (- 8.7%)
  • NASDAQ (-13.3%)
  • DAX (-14.7%)
  • NIKKEI (-15.6%)
  • Shanghai Composite index (-19.83%)

Activist investor Daniel S. Loeb, the founder of $17.5 billion Third Point, wrote to his investors that the indices declines “actually fail to capture the true carnage revealed when you take a closer look at the breadth of S&P companies experiencing massive losses.”

He continued: “In some cases, these losses may represent permanent value destruction. The 2015 market we dubbed a Haunted House feels about as scary as the Disney kids’ ride ‘It’s a Small World when compared to 2016.”

In 2015, Loeb characterised the market as a “haunted house” because it felt like there was a scary new market event lurking around every corner.

It doesn’t seem so scary compared to this year.

It’s been a horrible start for hedge funds in general with the average hedge fund falling -2.76% in January. It follows an awful 2015, with the average fund falling -3.64%, data from Hedge Fund Research shows.

This year is shaping up to be a “Wall Street recession,” according to Loeb. We haven’t reached the point where it’s a “Main Street recession,” but if we do it’s going to be bad.

Here’s Loeb:

So far this year, markets have suffered from a more steady drumbeat of negative news about China’s demise, how-low-can-they-go commodity prices, a possible US recession, high yield credit sell-offs, spiking national deficits, and Fed policy and statements that appear incoherent to many market participants. Additional toxic ingredients have been added to the mix in February: whispers of instability among major European Financial institutions, unusual currency volatility and negative rates in some major economies, and a massive sell-off in the momentum stocks that sheltered some investors last year.

As we look around the world, we see a need to rebalance important parts of the global economy and concurrent industrial over-capacity in some sectors. Imbalances like these create inequality and discontent and we attribute the unusual state of the US election to this sentiment. There is no doubt that the rise of populism in the Presidential race is creating further market uncertainty. So far, however, this is a “Wall Street” recession, not a “Main Street” recession. It is unclear at what point a falling stock market begins to impact consumer wealth such that American buyers retrench. If we reach this point, there is no doubt that the economic picture in the US becomes grim.

Third Point’s Offshore Fund fell 1.4% in 2015, while the S&P 500 gained 1.4%. Third Point fell 3.4% in January.

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