Why is Patrick Armstrong short on the markets

"Valuation doesn't matter in the short term but at current CAPE (cyclically adjusted price to earnings, which gives a more clear indication of a stock price in comparison to average earnings over the last 10 years) of 29 times, U.S. equities have historically delivered negative real returns over periods of two to five years," he said in an investment outlook published earlier this month.

The U.S. Federal Reserve has begun normalizing its policy in the wake of improved economic growth and low unemployment levels. According to Armstrong, the easy monetary policy of the past had boosted equities but this might change with the Fed's plans to hike rates and reduce its balance sheet.

The other reason to be "short" – where a trader takes a bet that prices will fall - on U.S. equities is the government's plans on fiscal policy. President Donald Trump promised tax cuts and big infrastructure spending, which made U.S. equities rally since he took office last November. However, such policies are yet to reach the consultation stage and doubts have emerged over the president's ability to deliver.

In the Plurimi investment outlook, the company says that it has sold stock of Apple, Alphabet and Microsoft since last month. It also has a short position on the S&P 500 and the Russell 2000, but is bullish on U.S. biotech, health care and telecoms.

Speaking on Tuesday, Armstrong suggested that investors aren't listening to the U.S. Federal Reserve. "What investors are completing underestimating is how low the bar is for the United States Federal Reserve. They have told us what they intend to do, the markets don't believe any of it," Armstrong said.

"The Fed says it's going to hike again this year, markets says 50-50. The Fed says three, four times next year, the market says it's not going to happen at all," he added.

According to a Reuters poll, about 45 percent of economists expect another rate hike at the December meeting, but 55 percent doubt that there will be any change in policy at that time. As we move into 2018, most people see higher chances of policy changes.

Source: Bloomberg

Junior Trader Stefan Panteleev