Back to top

Bear-Market Fears Emerging?

Read MoreHide Full Article

Friday, September 22, 2017

As the Fed plans to unravel its monstrous $4.5 trillion on the books, the era of “cheap money” is now apparently on the wane. At the same time, we continue onward through a nearly unprecedented stock market rally over the past 8 3/4 years. Though things seem to cost more — think ballgame tickets, for example — main inflation metrics have not had their wires tripped yet; we see mostly stagnant wage growth in our strong domestic labor market, and real estate prices have only grown more expensive in choice locations around the U.S.

There are serious, but still relatively vague, threats on the horizon: nuclear war scenarios with North Korea, natural disasters occurring that climatologists predicted would have resulted from global climate change, failed states in the Western hemisphere like Venezuela warning of political contagion and a still-hovering investigation about Russia meddling in the U.S. election last year all qualify under this heading. Any one of these things could upend markets in untold ways, but none are considered imminent — and may turn out to be nothing at all.

But when we see alarm bells ringing from respected economists like Yale’s Robert Shiller (founder of the Case-Shiller Index on U.S. housing prices), who said yesterday that “the U.S. stock market looks a lot like at did at the peak before all 13 previous price collapses,” investors may look at this as another brick in a new wall of worry. (Shiller defines a bear market as a 20% drop in prices, but does not issue a firm timeline for this drop.)

Shiller’s own cyclically adjusted price-to-earnings (CAPE) ratio — found by dividing “real” (adjusted for inflation) market value by a 10-year earnings average — is far beyond the highest levels seen going all the way back to 1881. The second-highest CAPE ratio for the index was during the tech bubble at the turn of the century; third place was directly prior to the Black Monday crash of 1929.

This said, Shiller does not point to specific avenues that look to take the market down directly by 20% or more, only that he states “it does amount to a stark warnings against complacency.” And with the Fed now beginning to turn the screws on monetary policy, signaling a new era of “non-complacency” by Chairwoman Yellen and company, perhaps this affords us a clear look at the horizon ahead of us.

And if Shiller won’t name-call specific threats to the market near-term, allow me: Much of what the run-up in stock prices has amounted to thus far is expectation of huge windfall gains from corporate tax reform, which would cut the current 38% nominal rate to something near 15%. This would also help repatriate corporations whose headquarters currently reside overseas, helping bring more revenues to the domestic economy. It won’t necessarily create a deluge of new jobs — companies will only hire when they see the explicit need to compete — but it will be great for shareholders of these companies. Meaning Wall Street stands to win big, and the “Trump Effect” has been largely attributed to this occurring, and sooner rather than later.

But what if it doesn’t happen? What if reconciliation on healthcare reform — designed to remove a cool $1 trillion from the books currently earmarked for Obamacare spending — does not pass by September 30? Well, that would create a different tax reform scenario — one that includes the other side of the congressional aisle, and common knowledge is that Democrats do not want to simply give giant cash handouts to corporations.

Further, should there be some real damage caused by Special Prosecutor Robert Mueller’s investigation into Russian involvement with the Trump campaign (and administration), this could sidetrack plans of corporate tax restructuring for the medium-term as well, depending on how far the indictments (if there are any) reach. Restructuring an entire new White House and perhaps sections of Congress — with midterm elections coming up in 2018, no less — would clearly send plenty of question marks surging directly into the stock market until the smoke cleared, which could take months. Or years.

In short, concerns about the resiliency to today’s bull market ought to be taken seriously. There are plenty of issues with the capacity to upend the apple cart. Those who choose to ignore them all in a fever of near-term upswell of asset value may be the first to feel the pain if and when a new downturn does take place.

Mark Vickery
Senior Editor

Questions or comments about this article and/or its author? Click here>>

In-Depth Zacks Research for the Tickers Above

Normally $25 each - click below to receive one report FREE:

The full Ahead Of Wall Street article

SPDR-DJ IND AVG (DIA) - free report >>

NASDAQ-100 SHRS (QQQ) - free report >>

SPDR-SP 500 TR (SPY) - free report >>

More from Zacks Ahead of Wall Street

You May Like