“This may all end badly,” as widely feared. There could be an “endgame” to this game. We may have no choice but to keep “kicking the can down the road.” However, it’s probably a one-way road with a cliff at the end of it. Those have been a few of the stock phrases used by the bears to warn that the current bull market isn’t sustainable and “cruising for a bruising.” The bull has been on a “sugar high” and “running on fumes.”
One day, within my lifetime, there will be a bear market in stocks. If stocks continue their current melt-up, there could be a wicked correction and even a bear market next year. Even if stocks continue to rise at a leisurely and seemingly sustainable pace, there could be trouble next year. That’s because the first year of presidential terms tends to be recessionary for the economy and bearish for the stock market.
Our hunch is that a selloff early next year would be more likely if Donald Trump is our next president. That’s not a politically biased view, but rather our objective assessment that the bull market prefers the status quo, which would be more likely if Hillary Clinton wins. We could be wrong, of course, and the reverse could be true if Trump cuts taxes, but backs off on trade protectionism, while Hillary goes full-bore socialist.
Perhaps the most likely political scenario is that whatever the outcome of the presidential race is, it won’t trip up the bull at all. He has stumbled a few times since March 2009, but somehow has managed to charge ahead to new record highs. Over the past few days, the bull has been a race horse--winning a couple of daily trifectas, with the S&P 500, DJIA, and Nasdaq all finishing together at new record highs.
Of course, the bull would be disqualified from competing in the Olympics. That’s because he has been injected numerous times with steroids provided by the world’s major central banks. The bears have been saying that’s not a fair game. Maybe so, but investing in stocks isn’t an Olympics event. Doped-up Russians were prohibited from competing in the games this year by Olympics officials. Central bank officials are the ones who usually end the race for stock market bulls. This time, they are doing everything they can to keep the rushing bull charged up and charging.
On Monday, in his WSJ column, James Mackintosh presented a similar perspective on the current bull market as we have been presenting since it began. It was titled “Central Banks Could Be This Market’s Pets.com.” He compared the current state of the stock market to the market’s condition in 1999. Back then, valuations were driven to record highs by the extraordinary optimism of investors on the outlook for technology companies. There were plenty of cheaper suitable investments available for more conservative investors, but it seemed that everyone wanted to ride the high-tech boom. The bubble burst when the dot.coms (like Pets.com) burned through all their cash and then burned investors.
This time, there is no euphoria among stock investors. Instead, there is much trepidation about the sorry state of the global economy. Central banks have responded to weak global growth by lowering interest rates to zero and even below the so-called “zero bound.” Now it is bond prices that seem ridiculously overvalued. While bond investors have enjoyed solid capital gains, they aren’t jumping for joy. Instead, they continue desperately reaching for yield. Today “rational desperation” in the bond market has replaced the “irrational exuberance” of the stock market during the late 1990s.
Mackintosh nicely sums up the impact of all this on stocks: “Pessimism has depressed bond yields, reducing the discount rate and so making even fairly stagnant future profits look more attractive in today’s money. Higher prices are justified, without needing much in the way of earnings growth.”
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research. To read more of his blogs, CLICK HERE NOW.
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