Billionaire investor Jim Mellon: Sharp sell-off in US stocks is the start of a 'very major correction'

  • A market correction is inevitable even without trade war fears, billionaire investor Jim Mellon told CNBC's "Worldwide Exchange" on Tuesday.
  • Mellon is not alone in suggesting that today's stock market is the most overvalued on record — more so than in 1929, 2000 and 2007.
  • Tuesday looks set to be a rough day for stocks, with the Dow Jones and S&P 500 indexes at risk of losing the majority of their June gains at the open.

Freshly announced trade tariffs from the White House may be sending stocks into a tailspin, but a market correction is inevitable even without them, billionaire investor Jim Mellon told CNBC's "Worldwide Exchange" on Tuesday.

The trade war worries are "certainly having an effect on the market, but the market is reacting because it's already far too expensive," Mellon said. "The U.S. is selling at 32 times cyclically adjusted price-to-earnings (PE) ratio, which is an all-time high. Surely it's time for a major correction anyway."

Mellon is not alone in suggesting that today's stock market is the most overvalued on record — more so than in 1929, 2000 and 2007.

The chairman of asset management fund Burnbrae Group also pointed to over-complacency in markets and disproportionate buying of what he considered to be highly-inflated assets like tech stocks.

And according to the investing mogul, the trade fears are just an excuse for market players who were already looking to sell.

"There has been far too much complacency, far too many buybacks by corporations of their stock which have supported the market, far too much concentration of ownership, particularly in tech stocks in the U.S. And it's time for a very major correction, which is I think what we're embarking on."

Tuesday looks set to be a very rough day for stocks, with the Dow Jones and S&P 500 indexes at risk of losing the majority of their June gains at the open. The S&P has been down for three of the past four days. The Dow has fallen for the past five trading days — and the last time it fell for six straight days was in March 2017.

The sell-off comes as the Donald Trump administration asks the U.S. Trade Representative to identify $200 billion worth of Chinese goods for additional tariffs of 10 percent. This would be in addition to a 25 percent tariff on $50 billion of Chinese products announced Friday, to which China responded with a 25 percent tariff on $34 billion of U.S. goods.

All major European and Asian indexes were lower, with the latter particularly hard-hit — China's Shanghai Composite was down nearly 4 percent, Hong Kong's Hang Seng down nearly 3 percent, and the technology-heavy Shenzhen Composite fell a striking 5.77 percent.

Pointing to the building sell-off, Mellon's outlook was not optimistic. "We've seen in last few days the Dow's gone down, there have been sideways moves, we're almost flat on the year — this is the beginning of a serious correction in my opinion."

'No universal trade war'

The investor's warning came despite his not taking stock in the idea of a trade war.

"I do not think there's going be a universal trade war, because globalization has been so good for everyone, including the U.S., and I'm sure President Trump knows that," Mellon added.

"But he is also a very good negotiator, he's shown that to be the case in the last year or so. So he may force the Chinese to do something about this ridiculous trade imbalance that they've mounted over the years."

America's trade deficit in goods with China hit a record $375 billion in 2017 and continues to widen. Between January and April of this year, China's trade surplus with the U.S. was $80.4 billion.

Still, a minority of economists see this as detrimental to the U.S. economy. American companies operating in China have pointed to unequal market access and poor intellectual property and legal protection as a much larger problem for U.S. business with Beijing.