Billionaire investor Cliff Asness says stocks are “terribly” unprepared for a macroeconomic shock if inflation doesn’t come down as expected.

  • According to Cliff Asness, stocks could face a macroeconomic shock if inflation does not fall as markets expect.
  • The billionaire investor said stocks are still expensive and have even more downsides.
  • “We are probably still in a bubble between cheap and expensive,” he told Bloomberg TV.

According to billionaire investor Cliff Asness, stocks could be shocked by macroeconomic conditions if inflation does not fall as the market expects.

“A fat-tailed event is likely macroeconomic,” the co-founder of AQR Capital Management warned in an interview with Bloomberg TV on Thursday. “There is a risk that the macroeconomics will produce outcomes for which the markets are still completely unprepared.”

Similarly, Bank of America warned that the market could be hit by a recovery in inflation and a looming recession, turning stocks on their head.

This comes on the back of a recent drop in equities as investors look to further rate hikes by the Fed following unexpected price and labor market data.

Asness also believes the market was in a bubble at the end of 2020, when ultra-low interest rates and ample liquidity propelled stocks to dizzying heights over the past decade.

While it no longer applies to the market, investors prematurely think that just one year of Fed tightening is enough to correct stock prices, he said, warning of further declines.

“We are probably still in a bubble between cheap and expensive. I would no longer call the market as a whole a bubble, I would just say that it is a very expensive market,” he added.

Experts warn that over the past year, central banks have raised interest rates by 450 basis points to tame inflation, a move that could lead to a recession in the economy. But inflation is still well above the Fed’s 2% target, and central banks are signaling further policy tightening next year.

Markets are now pricing a 25 basis point hike in March and another quarter point hike in May, bringing the Fed’s funds rate target to 5-5.25%. That would be the highest interest rate range since 2007, causing Wall Street analysts to sound the alarm about an impending stock crash.

Other Wall Street observers are warning of more headwinds in 2023 as companies continue to grapple with high inflation and tightening financial conditions. Morgan Stanley said the stock is now in a “death zone” and could drop 26% over the next few months.

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