Oaktree Co-Founder Warns of U.S. Stock Market Bubble

Oaktree Capital Management co-founder has issued a cautionary statement, asserting that the U.S. stock market is currently in the "early stages" of a bubble. Despite the absence of a critical point for market adjustment, the co-founder underscored the concern that current market valuations are excessively high. This perspective draws parallels to the late 1990s, when the fervor surrounding tech stocks prompted former Federal Reserve Chairman to issue a warning about "irrational exuberance."

The co-founder acknowledged that, following this period, the market continued to rise for several years before the tech bubble eventually burst. This historical context serves as a reminder that market corrections, though not immediate, are a likely occurrence. The co-founder emphasized that investors have grown accustomed to market corrections, but the principle of mean reversion remains a significant factor to consider.

In light of these observations, the co-founder advised investors to increase their defensive allocations within their portfolios. One suggested strategy is to invest in credit rather than stocks, as credit investments are seen as more defensive. While acknowledging that corporate bond spreads are currently narrow, the co-founder maintained that such investments still offer a higher level of defense compared to stocks.

When questioned about the suitability of the U.S. market for defensive investments, the co-founder compared the U.S. to a "high-priced good car." This analogy highlights the U.S. market's robustness and attractiveness, despite other regions lacking the same vitality or ideal regulatory environment. Although the fundamental investment environment has slightly deteriorated, the U.S. remains the premier investment destination globally.