Am I being overly paranoid to worry about the stock market during a week when the Dow finally reached the 22,000 mark. Even the fact that the move was largely on the shoulders of Apple’s jump higher after it released great earnings news shouldn’t make much of a difference. The trend is the trend, and it is still to the upside. So, is there no end in sight? Euphoria, etc., we’ve seen this before. Make money on the up moves while you can, it’s fun! But don’t gamble with your Retirement Money by leaving everything “on the table.”
While the Dow and other major market indices soar, danger signs and red flags abound, as technical analyst Michael Kahn points out in his Barron’s column. August typically has relatively low trading volume, Kahn writes, and this means that a slight change in mood among a relatively small number of traders on the margin can produce big market swings. He notes that the flash crash of 2015, when the Dow shed 1,100 points in just 4 minutes, took place on August 24 of that year.
Worries about narrow market leadership by, and high valuations on, big tech stocks are one potential trigger for a correction that Kahn mentions. Others that he does not mention include: potential international crises involving North Korea and Russia; political controversies swirling around president Trump, such as the Russia investigations; Trump’s threats to launch trade wars; and the anemic U.S. economy.
Other predictions from five well-known market gurus, all trend bearish. Overvalued stocks were a chief concern of: Tom Forester, the founder of Forester Capital Management; Marc Faber, a consistently bearish newsletter author; and Rob Arnott, a pioneer of smart beta investing and the CEO of investment advisory firm Research Affiliates LLC. For his part, Forester added that the last two general market crashes were touched off by a collapse of investor confidence in a single sector. In the year 2000 it was tech stocks, and in 2008 it was financials. Faber also worried about narrow market leadership, with small numbers of stocks driving the major indexes upward.
Jim Rogers, who co-founded the Quantum Fund with George Soros, expressed concern over debt loads that are higher than prior to the financial crisis in 2008. Legendary bond fund manager Bill Gross, formerly of PIMCO and now with Janus Capital Group LLC, also worried about high indebtedness, weak productivity growth in the real economy, and an oversized financial economy. Earlier this year, Gross issued warnings similar to those made by Greenspan recently: that is, central banks’ massive infusions of liquidity since the financial crisis have created huge economic and financial distortions that will unwind with unpleasant market outcomes. (For more, see also: Bear Market Ahead: What 5 Big Investors Forecast.)
For yet another source of worry, former Federal Reserve Chairman Alan Greenspan is warning of a bond market collapse that would bring down stocks. Greebspan says this is likely to happen after interest rates shoot up much faster than many people anticipate. (For more, see also: Stocks’ Big Threat Is a Bond Collapse: Greenspan.)
Unsustainable Interest Rates
“By any measure, real long-term interest rates are much too low and therefore unsustainable. When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace,” Greenspan comments to Bloomberg.
When central banks start withdrawing liquidity from the financial system in earnest by selling their bond holdings, Greenspan believes that long term interest rates will spring sharply upwards. Thus, bond prices will collapse. Greenspan says that would lead to the worst bout of stagflation since the 1970s, a period when inflation accelerated amid a stagnating U.S. economy. This environment would spark a nosedive in stock prices, Greenspan continues, because sharply higher bond yields could spur a massive movement of investor capital from equities to fixed income instruments. (For more, see also: Bill Gross: QE is “Financial Methadone.”)
The Fed Model
The so-called Fed Model consulted by Greenspan, as explained by Bloomberg, compares the yields on 10-year U.S. Treasury Inflation Protected Securities (TIPS) to the earnings yield on the S&P 500 Index (SPX). The current figures are 0.47% and 4.7%, respectively, per Bloomberg, which notes that the gap between the two measures is 21% greater than its 20-year average. For those who subscribe to this analytical framework, high valuations for stocks are justified for now. However, another spin on this analysis, per Bloomberg, is that investors are justified in buying the less inflated asset. If bond prices rapidly deflate, as Greenspan foresees, stock prices will soon follow.
My question to you is, “If market experts are worried about rapid reallocations occurring in the macro scale, why aren’t you concerned about the impact on your IRA/401k, and other retirement assets?” Contact me now to schedule a discussion and review options available for your family’s security.