David Tepper, founder of $20 billion hedge-fund firm Appaloosa Management LP, said he’s nervous about markets as the U.S. economy isn’t growing fast enough amid complacency by the Federal Reserve.

“We have this term called coordinated complacency to describe the world’s central banks right now,” Tepper said yesterday at the SkyBridge Alternatives Conference in Las Vegas. “The market is kind of dangerous in a way.”

Tepper, 56, who started his Short Hills, New Jersey-based firm in 1993, said he’s more worried about deflation than inflation and that this is the time to preserve money. The fund manager, who is worth $7.9 billion according to the Bloomberg Billionaires Index, said that while investors can be optimistic on markets, they should hold some cash.

“I think it’s nervous time” he said, adding that markets may “grind higher” in the near term.

Fed Chair Janet Yellen last week said the world’s biggest economy still requires a strong dose of stimulus. U.S. stocks slumped today with the Standard & Poor’s 500 Index sliding 1.2 percent at 11:20 a.m. in New York. Equities had reached all-time highs this week after three rounds of monetary stimulus helped fuel economic growth, sending the S&P 500 Index (SPX) surging as much as 180 percent from its 2009 low.

Tepper said in November that stock markets aren’t inflated and that while he was optimistic about U.S. equities, they may fall 5 percent to 10 percent when the Fed curbs its monthly stimulus program.

David Fuller's view

I do not think the Fed is complacent.  However, at yearend 2013, Fuller Treacy Money forecast a choppy, rangy outlook for Wall Street in 2014, with some sharp downward moves.  This forecast has been repeated on a number of occasions over the last four and a half months, based on the following reasons: 1) Wall Street was completing the fifth year of a bull market recovery; 2) The S&P 500 Index (weekly & daily) surged over 30% in 2013, while the Nasdaq Composite and Russell 2000 were even stronger through yearend 2013; 3) Valuations were no longer cheap for the majority of US shares and expensive for ‘new tech’; 4) US earnings were often flattered by corporate share buyback programmes; 5) QE tapering was underway.

Additional signs of an aging bull market have emerged this year: 

1) The ‘new tech’ and momentum stock bubble has burst; 2) Market breadth is deteriorating; 3) Indices which led on the upside such as the Nasdaq Composite and Russell 2000 have lost uptrend consistency and show potential top formation development; 4) Bank shares are underperforming. (See also Eoin’s comments below.)

So how concerned should we be today?

I think we should be prudent but I see no reason to panic if you hold a sensible portfolio in the USA or anywhere else that is likely to be influenced by Wall Street. For instance, I would not be tempted into ‘new tech’ because a potentially lengthy medium-term consolidation is underway.  I would be cautious about recently popular growth stocks trading on high multiples and offering low yields.  The S&P 500 is currently trading on a trailing 12-month PER of 17.21, according to Bloomberg.  I have read that its historic mean over the last several decades is 15.51, so it is not dangerous today but it is certainly not cheap.  In this environment, I would favour value stocks that have PERs in the 10 to 12 range and pay attractive dividends.  These will include some cyclical resources shares such as BHP Billiton which has a trailing and estimated PER of just over 12 and yields 4%.  Historically, the US stock market underperforms during 2Q and 3Q, so I would be cautious about investing new money in growth stocks until we see a decent shakeout and the crowd is frightened.