• AQR co-founder says ‘fat tail event’ would be macro economic
  • Quant pioneer says world too quick to think valuations fixed

Billionaire quant investor Cliff Asness warned Thursday that US stocks are vulnerable to a macro shock if inflation doesn’t stage a spirited decline as the market expects.

The co-founder of AQR Capital Management LLC told Bloomberg Television that despite last year’s declines equities remain expensive versus history, based on a broad assumption that price growth is set to slow.

“The fat tail event probably is macro economic,” Asness said, referring to an extreme event whose probability the market underestimates. “There’s a risk that the macro economy delivers results that markets are still woefully unprepared for.”

The comments come as hot economic data sows fresh market turbulence this week with bond and equity investors ramping up expectations for Federal Reserve interest-rate hikes. That’s a reversal from the start of 2023, when signs of a peak in price growth raised hopes policymakers would ease back on tightening.

Asness is basking in the glow of one of AQR’s best years on record, when systematic funds focused on strategies like value and trend following thrived as inflation lashed markets. Big declines for expensive-looking shares mean the valuation spread to cheap shares has “come back decently,” Asness said, but the world is too quick to think it’s fixed after just a year.

“They had 10 years of going the other way,” said Asness. “We’re probably still in a bubble in cheap versus expensive. I wouldn’t call the overall market a bubble anymore, I would just say it’s a very expensive market.”

The quant money manager said that while he can’t predict the short term, he thinks it’s likely the value revival will ultimately continue.

Read more: AQR Boosts 60/40 Return Outlook, Breaking From Years of Gloom

According to the price-to forward earnings ratios of MSCI indexes, global growth stocks are still 1.8 times more expensive than value — down from the late 2021 peak but still higher than the 20-year average of 1.4 times. 

By AQR’s own calculations, the valuation gap between the priciest and cheapest stocks is still at the 94th percentile, Asness wrote in early January.

Written by:  and  — With assistance by Justina Lee @Bloomberg.com

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