For Kenneth Pasternak of real estate company KABR Group, the recent highs and lows in the stock market are nothing more than natural progression of the economic cycle coupled with stock market psychology.
“If you want to boil it down to a sentence, if you were a pundit on CNBC, you would say that stock market assets need to be repriced in a higher-interest world,” he said.
Pasternak, who once was the CEO of equities trading organization Knight Trading Group, said the lack of a correction in stock prices for almost two years compounded with the recent change in interest rate raises, can explain the stock market’s dramatic downturn Friday and Monday when the Dow Jones Industrial Average dropped 1,841 points. It has since rebounded.
As interest rate hikes have become more commonplace over the last year and a half – and are expected to continue through 2018 – a correction was bound to take place, he said.
“The market has ways to go towards being repriced properly,” Pasternak said. “I think the market is going to be lower for at least the next couple of quarters and that this repricing is in its early stage. The underlying repricing mechanism that has to occur is probably a three-month-to-six-month exercise. It’s a pretty significant repricing that I would say is at least 10 percent and maybe as much as 20 percent off the highs. And it is going to react to macroeconomics.”
The changes to the Federal Reserve itself with the appointment of Jerome Powell as its new chair, Pasternak said, may have been just what the market needed to push trading over the brink and begin connecting the dots.
But one can never know for sure, he added.
“Sometimes it’s not binary where market psychology is not that logical where they read a headline,” he said. “From an outside-in perspective, you might think something like, Warren Buffet said something and he’s a guru and 15 million people went to their computers and pushed the ‘Sell’ button. But, it’s just an inflection point that starts with a spark, maybe, and it creates a psychology ‘fire’ that starts this repricing. One never knows exactly, when it is going to happen until afterwards until you see how it happens, but a lot of it is that you need the condition.”
And while there is speculation as to what this performance means for the U.S. economy as a whole, Pasternak said a correction in pricing relative to interest rates means there is not much to worry about, relative to macroeconomics, anyway.
“If we continue to have growth and we continue to have a healthy economy, if unemployment stays at 4.5 percent and GDP stay about 2 percent, the stock market will probably go higher then,” he said. “But I think repricing is not in reaction to macroeconomic news. It’s in reaction to a relative value because of the interest rate environment.
“I have a strong level of conviction that the market will be significantly lower six weeks from now.”
Depending on the circumstances, Pasternak said, the volatility in interest rates and the market could be enough to sit in the sidelines and wait for the repricing to take shape.
“Where interest rates appear to be going in the next 18 months, the market needs to be another 10+ lower for me to be interest in redeploying my capital in stocks,” he said. “I don’t mind not being invested in anything until I see this repricing right itself.”
Pasternak was the CEO of Knight Capital Group from 1995 until 2001. KCG was at one point the largest trading group in US equities.
In 2013, following a computer glitch that amounted to a loss of nearly $460 million, KCG was acquired by Global Electronic Trading Company, who was then acquired by Virtu Financial in 2017.
KABR Group has more than $2 billion in ongoing projects with an emphasis in Jersey City and Jacksonville, Florida.
In 2016, KABR Group, chaired by Pasternak, opened a multifamily development with Kushner Companies at 65 Bay Street Jersey City. KABR Group and Kushner are in ongoing negotiations for their joint-venture, One Journal Square.