It’s inevitable; before every market crash there’s always an analyst on television insisting the market’s overvalued and due for a correction. The problem is that before every new high and monster “up” day there’s an analyst on television insisting the market is overvalued and due for a correction. If you watch financial television regularly you know there’s someone on television every single day saying the market’s going to crash. The ones who get lucky can endlessly replay that clip of their correct prediction on their personal highlight reel, conveniently editing out all the times they were wrong.
Even experts can’t unfailingly predict the ups and downs of the market. The best anyone in the financial media can do is point out potential trouble spots. Just because the market should go down, it doesn’t mean it will. All the same, we’ve been on a massive bull run for nearly a decade and there are ample signs the U.S. economy is indeed reaching a point of diminishing returns. That’s what Art Cashin, director of floor operations on the NYSE for UBS, calls stall speed.
Infinite Growth with Finite Resources?
First, let’s take a trip to the 20,000 foot level and talk about the irrational expectation that we can have infinite growth on a planet of finite resources. As the world becomes more developed, growth will level off until it reaches equilibrium. We may not be at full development just yet but we’re getting close, and the simple fact is that the earth can’t support two percent growth every year indefinitely.
Oil’s Slippery Slope
Right now higher stock market levels are being fueled by the hope of higher oil prices. The energy sector has been getting slammed by low oil prices and there’s a faint hope that Saudi Arabia will trim production to boost prices. But the Saudis are no friends to the United States and the two-year glut of overproduction has dealt a blow to U.S. domestic oil production. Then there are all the companies that took out billions in loans with the expectation that prices would never slide. Layoffs, closures and resulting defaults are already underway, and we only have to remember back to 2008 to realize what billions in defaulted loans does to an economy.
Fed Giving Alarmingly Mixed Signals
Most analysts agree that a Fed rate hike in September should be unlikely, but there are disturbing hints being sent out. If our central bank does decide on a surprise rate hike, it will knock the props out of stock market prices. Every crash starts with a spark and a shock rate hike would be just the thing to trip off a correction. Ironically, a market crash would likely prompt the Fed to give back the rate hike almost immediately. In fact, it would be just like this Fed to grievously mis-time a rate boost, cause a lot of damage, then ask for a Mulligan.
Another thing you’ll hear nearly every day is that the market is overvalued. Like market crashes, trying to hang a value number on something as large and complex as the economy is nearly impossible. What we can do is compare today’s market valuation to past corrections, and by that metric things don’t look so good right now. The current market is more overvalued than almost all bull market peaks of the past 115 years. Market valuation is like gravity in that markets can sometimes float around overvalued for a long time but, sooner or later, that hard turn into the ground will happen.
Right now money is still flowing into the stock market because investors lack better options. Money is flowing to U.S. markets from overseas, where investors are concerned about the future of the post-Brexit European economy and the stability of the Middle East. We’re also seeing money flow to us from China after investors there were seriously burned by overheated and unsustainable Chinese markets. This panicked inflow of money is inflating U.S. markets and that’s going to end badly.
Smart small investors are skimming profits as the market makes new highs and converting to liquid hard assets, like gold and silver coins, particularly for accounts that have to stay solvent over the long haul – like a thirty-year retirement. That’s a good trade at today’s valuations.