One has to be amazed at the strength of the US stock markets as they climb relentlessly to new highs on a wave of easy money, stock buy backs and short covering and all despite a lack of major retail participation. The market continues to ignore growing danger signs. The key indicator may be the Case Shiller PE Ratio that most recently was at 28.85, a level seen only three times in the past century; in 1929, before the October 1929 stock market crash and the Great Depression, and in 1999, before the peak of the Internet/high-tech bull market that presaged the 2000 – 2002 Tech Wreck crash. The mean and the median over a century stands at 16.72 and 16.09 respectively. The Case Shiller PE ratio is higher today than it was in 2007 before the 2007 – 2009 financial crisis crash and subsequent Great Recession.
Of course, that is not the only indicator flashing warning signs. Sentiment indicators, momentum indicators, breadth indicators, put/call option indicators, spreads on junk bonds, stocks trading over their 200-day MA and stocks hitting new 52-week highs exceeding stocks hitting new 52-week lows and market volatility indicators as measured by the VIX are all at or near extremes, flashing warning signs about the stock market. Yet the market ploughs higher. Even the S&P TSX Composite has kept pace regularly, setting new all-time highs led primarily by financials.
But there may be another indicator that also appears to be exuding the same confidence as the stock market and that is consumer confidence.
Larry Fink of BlackRock Funds, the world’s largest asset manager, noted something interesting recently. The consumer confidence indicator soared following the election of Donald Trump, just like the stock market. Consumer confidence is a measurement of how people feel about the economy and their own financial situation and it seems following Trump’s election that they are feeling bettereconomically. The consensus before the election was that if Trump were elected the market could crash. Well, it did – at least, for a nanosecond before Trump’s billionaire friend Carl Icahn stepped into the market and apparently bought a $1 billion worth of stocks. The result was: not only did the stock market reverse to the upside but the US$ rose sharply and gold and bond prices plunged. That is why the S&P 500 is up 9% since the election and the Dow Jones Industrials (DJI) has continued rising over 20,000. Consumer confidence followed and it is at its highest levels in well over a decade.
The markets are enamoured with the thoughts of deregulation, particularly financial deregulation, infrastructure spending, tax cutting and increased defence spending. Deregulate, cut taxes and spend more and, of course, put ‘America First’ to make ‘America Great Again.’ Not only did the investment and business community buy in but consumers did as well, it seems. The consumer confidence index is up 13% since October 2016.
There is an old saying from investment guru John Templeton that says …
Bull markets are born on pessimism, grown on scepticism, mature on optimism, and die on euphoria. Thetime of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.
Still, the cracks in the markets have not as yet been seen. And that is in spite of a growing scandal surrounding the firing/resignation of National Security Advisor Michael Flynn, that attempts to ban Muslims from seven countries were ‘shot’ down by the courts, that deregulation may be harder to bring about than they think, that infrastructure spending and ‘the wall’ may have difficulty in passing Congress, there might even be a fight over tax cuts and growing protests over the Trump administration. And then there is the debt ceiling that comes up for renewal in March. In the past, the battle over the debt ceiling has been rancorous and has occasionally resulted in the shutdown of government. The US national debt is currently just under $20 trillion against an authorized debt ceiling of $18.1 trillion.
This post was published at GoldSeek on 17 February 2017.
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