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David Einhorn warned of a slump in stocks and potential recession in his third-quarter letter.
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Foreign conflicts could drive up gas prices, squeezing consumers and cooling the economy, he said.
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“It’s a tricky time and we remain worried about the direction of the market,” Einhorn said.
The conflicts raging in Ukraine and Gaza threaten to deal an indirect blow to American consumers, fueling an economic slump that pulls down stocks, David Einhorn says.
The Russia-Ukraine and Israel-Hamas wars could disrupt global oil supplies and drive up US gas prices, particularly because the Biden administration has tapped the Strategic Petroleum Reserve and discouraged oil drilling, Einhorn warned in his third-quarter letter to Greenlight Capital investors, which ValueWalk published on Thursday.
“Higher oil prices would squeeze the consumer and likely cause a recession,” the hedge fund manager said. “The resulting inflation would also put the Federal Reserve in the uncomfortable position of having to fight rising prices at a time of rising unemployment. This leaves the market outlook very concerning.”
Einhorn may be especially worried about American consumers given their tough situation. They’ve seen the prices of food, fuel, housing, and other essentials surge over the past couple of years, with inflation spiking as high as 9.1% last summer.
They’ve also faced big increases in the monthly payments for their mortgages, car loans, credit cards, and other debts, as the Federal Reserve has hiked interest rates from nearly zero to over 5% since last spring in an effort to slow inflation.
Foreign conflicts might strike investors as far less important. Indeed, Greenlight’s founder and chief noted the stock market opened lower on the first trading days after Russia’s invasion of Ukraine and Hamas’ assault on Israel, but closed in the green. Yet he cautioned against shrugging off international disputes as largely irrelevant for markets.
“If we are right, current extreme levels of geopolitical tension will lead to lower stock prices over a timeframe that lasts more than a couple of hours,” he said. “At that point, we intend to be positioned to buy beaten-down stocks and some truly distressed debt, should the opportunity present itself.”
For now, Einhorn and his team are exercising caution given the clouded outlook.
“We are effectively on a ‘buyers’ strike’ again and did not establish any material long positions during the quarter,” he said. “It’s a tricky time and we remain worried about the direction of the market.”
Indeed, Greenlight slashed its gross exposure from 191% to 160% last quarter, as it wanted to be free to pursue new ideas once the market backdrop improved. Even so, the hedge fund returned a net 12.9% in the third quarter, trouncing the S&P 500’s 3.3% decline over the same period. Moreover, it gained 27.7% in the first nine months of this year, crushing the S&P 500’s 13.1% return.
Given the risk of gas prices surging, unemployment jumping, and a recession striking, Greenlight has “limited exposure to the US consumer,” Einhorn said. Instead, it’s heavily invested in energy and holds futures and options that stand to gain from more expensive crude throughout 2024, he noted.
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