Even as the market has taken a tumble this week, veteran investor Stanley Druckenmiller said this week that the stock market has fallen into a mania fueled by the Federal Reserve and wild investor speculation.
And that mania will end badly in the years to come.
“Everybody loves a party… but, inevitably, after a big party there’s a hangover,” Druckenmiller said. “Right now, we’re in an absolute raging mania. We’ve got commentators encouraging companies to do stock splits. Companies then go up 50%, 30%, 40%, on stock splits. That brings no value, but the stocks go up.”
Both Apple (NASDAQ: AAPL) and Tesla (NASDAQ: TSLA) recently announced stock splits, and both stocks skyrocketed following their announcements, with Apple shares jumping 34.2% within a month of announcing its 4-for-1 stock split and Tesla rising 82.5% after it announced its 5-for-1 split.
Furthermore, after the market hit bottom on March 23, the S&P 500 index gained 60% at its peak last week—even amid the raging coronavirus pandemic and subsequent economic collapse—before falling -7% over the last week.
“I have no clue where the market is going to go in the near term,” Druckenmiller said. “I don’t know whether it’s going to go up 10%; I don’t know whether it’s going to go down 10%. But I would say the next three to five years are going to be very, very challenging.”
Druckenmiller attributes the market’s massive move higher over the last several moths in large part to the measures taken up by the Federal Reserve in reaction to the coronavirus crisis.
While Druckenmiller says the Fed has done a “great job” since March by cutting its benchmark rate to 0% and launching an unprecedented stimulus effort to sustain the economy, the resulting market rally “has been excessive.”
Not only that, but for the first time in a long time, Druckenmiller is concerned about inflation skyrocketing.
“The merging of the Fed and the Treasury, which is effectively what’s happening during COVID, sets a precedent that we’ve never seen since the Fed got its independence,” Druckenmiller said. “It’s obviously creating a massive, massive mania in financial assets.”