A hedge fund chief who oversees $1.7 billion unloads on the 'lockdown traders' who helped push stock valuations to historically absurd levelsand warns a drop of at least 60% is on the cards

<p><img src="https://static4.businessinsider.com/image/60ba657ee459cb0018a2c46c-1776/gettyimages-621947950.jpg" border="0" alt="trader upset angry" data-mce-source="Getty Images / Spencer Platt"></p><p></p><bi-shortcode id="summary-shortcode" data-type="summary-shortcode" class="mceNonEditable" contenteditable="false">Summary List Placement</bi-shortcode><p>Mark Yusko doesn't beat around the bush when talking about his <a href="https://www.businessinsider.com/category/market-outlook">market outlook</a>.</p><p>Stocks are due for a 60% pullback or more to reach what would be considered fair value levels by historical standards, the hedge fund chief said in a May 20th <a href="https://www.youtube.com/watch'v=bwH5a1Q1930">episode</a> of his market commentary show.</p><p>"I'm not saying that has to happen tomorrow," said Yusko, the founder of <a href="https://www.businessinsider.com/category/morgan-creek-capital">Morgan Creek Capital</a>. "But you don't see anything in either one of those charts where you get a peak and then plateau," Yusko said. "It's coming." His firm oversees $1.7 billion in assets.</p><p>Below are the charts Yusko is referring to. Essentially, they show that a variety of valuation indicators are at historically high levels. The chart on the right shows the <a href="https://markets.businessinsider.com/index/s&amp;p_500">S&amp;P 500</a>'s valuation at 199% above "fair value."&nbsp;</p><p><img src="https://static6.businessinsider.com/image/60ba8c72e459cb0018a2c53c-2290/Screen Shot 2021-06-04 at 42559 PM.png" border="0" alt="Screen Shot 2021 06 04 at 4.25.59 PM" data-mce-source="Morgan Creek Capital"></p><p>Eleven of 14 valuation indicators Yusko looks at are at all-time-highs. <a href="https://www.businessinsider.com/category/stock-valuations">Valuations</a> are among the most egregious in small-caps, he said.&nbsp;</p><p><img src="https://static2.businessinsider.com/image/60ba8c8c93c6fa00195e5521-2296/Screen Shot 2021-06-04 at 34321 PM.png" border="0" alt="Screen Shot 2021 06 04 at 3.43.21 PM" data-mce-source="Morgan Creek Capital"></p><p>Yusko blames this on the heightened liquidity in markets thanks to monetary stimulus from the Federal Reserve. He also cited the speculative behavior of "lockdown traders." The retail-trading frenzy that picked up at the start of the pandemic was apparent again last week as <a href="https://markets.businessinsider.com/news/stocks/market-analysts-warn-against-meme-stock-gambling-as-amc-whipsaws-2021-6-1030492938">shares of AMC</a> and other so-called meme stocks skyrocketed relative to the broader market.</p><p>To further illustrate historically high valuations, Yusko pointed to S&amp;P 500 price action compared to earnings, which have just recently recovered to around pre-pandemic levels. The gap between earnings and price is the widest it's been in at least 30 years.</p><p><img src="https://static6.businessinsider.com/image/60ba8cb7e459cb0018a2c542-2300/Screen Shot 2021-06-04 at 34535 PM.png" border="0" alt="Screen Shot 2021 06 04 at 3.45.35 PM" data-mce-source="Morgan Creek Capital"></p><p>In addition to valuations, Yusko pointed to three other indicators that show equities are in a precarious position. One is the spiking rate of <a href="https://markets.businessinsider.com/news/stocks/stock-market-outlook-hedge-higher-inflation-blackrock-commodities-supply-chain-2021-6-1030488895">inflation</a> currently as businesses face supply shortagesthe Consumer Price Index, a popular measure of inflation, jumped by 0.8% in April, the most in a month in over a decade. Year-over-year, it was up 4.2%.</p><p>Yusko explained why this is problematic using a chart (below on the right). Basically, it shows that the higher price-to-earnings ratios go, the closer to 0% inflation there usually ishence the pyramid shape.&nbsp;</p><p>The current dot is represented in yellow (the highest dot on the chart, representing the highest P/E ratios). Given that inflation is above 4%the dot is moving the right, showing higher inflationthe chart implies that stock valuations should be lower.</p><p><img src="https://static2.businessinsider.com/image/60ba8d9993c6fa00195e552c-2294/Screen Shot 2021-06-04 at 30449 PM.png" border="0" alt="Screen Shot 2021 06 04 at 3.04.49 PM" data-mce-source="Morgan Creek Capital"></p><p>Inflation is dangerous for markets because it causes interest rates to spike, meaning investors become more compelled to buy bonds instead of stocks, particularly those with high growth expectations.&nbsp;</p><p>Yusko is also concerned about the amount of stocks selling from insiders.&nbsp;</p><p>"Insiders know more about companies than investors. Insiders don't sell at bottoms," he said. "Insider selling is the highest it's ever been. There's a reason for that."</p><p><img src="https://static5.businessinsider.com/image/60ba9bae93c6fa00195e557e-2278/Screen Shot 2021-06-04 at 52935 PM.png" border="0" alt="Screen Shot 2021 06 04 at 5.29.35 PM" data-mce-source="Morgan Creek Capital"></p><p>Finally, Yusko believes the Chicago Board Options Exchange Volatility Indexalso known as the VIXis showing technically that it's likely just bottomed out.</p><p><img src="https://static4.businessinsider.com/image/60ba8ea5e459cb0018a2c556-2248/Screen Shot 2021-06-04 at 43516 PM.png" border="0" alt="Screen Shot 2021 06 04 at 4.35.16 PM" data-mce-source="Morgan Creek Capital"></p><p>"VIX is getting set to probably have a meaningful spike," he said. The index tends to move in the opposite direction as the S&amp;P 500.</p><h2><strong>Yusko's views in context</strong></h2><p>With stocks hovering around all-time-highs amid the low interest rate environment and sizable monetary stimulus, there is no shortage of indicators flashing warning signs that stocks are over-extended.&nbsp;</p><p>Allianz Global Investors' Head of Global Strategy <a href="https://www.businessinsider.com/stock-market-crash-bubble-indicators-red-flags-allianz-strategist-warns-2021-5">Stefan Hofrichter</a>, for example, recently came out with a list of reasons (below) he fears that stocks are in bubble territory.&nbsp;</p><p><img src="https://static6.businessinsider.com/image/60b14d7c02ac410018f93824-1232/Screen Shot 2021-05-28 at 12904 PM.png" border="0" alt="Screen Shot 2021 05 28 at 1.29.04 PM" data-mce-source="AllianzGI"></p><p>Current valuations and the overheating economy have also led equity strategists at Wall Street investment banks like <a href="https://www.businessinsider.com/stock-market-returns-wall-street-banks-valuations-goldman-ms-bofa-2021-4">Goldman Sachs, Morgan Stanley and Bank of America</a> to warn of weak returns from the S&amp;P 500 in the years ahead, though they don't necessarily see a bubble in stocks.</p><p>It's difficult to know where stocks go from here. Upside surprises on earnings and growth could continue to propel stocks upwards. But with valuations so extended, they may be sensitive to poor numbers.</p><p>As Yusko said, stocks aren't prone to going sideways when valuations get as steep as they are.&nbsp;</p><p><a href="https://www.businessinsider.com/stock-market-crash-expert-warns-stocks-will-fall-mark-yusko-2021-6#comments">Join the conversation about this story &#187;</a></p> <p>NOW WATCH: <a href="https://www.businessinsider.com/pikes-peak-hill-climb-colorado-most-dangerous-racetrack-2020-2">Why Pikes Peak is the most dangerous racetrack in America</a></p>
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