{"id":19664,"date":"2020-01-22T02:13:31","date_gmt":"2020-01-22T02:13:31","guid":{"rendered":"https:\/\/thepatientinvestor.com\/?p=19664"},"modified":"2020-01-22T03:52:51","modified_gmt":"2020-01-22T03:52:51","slug":"the-bull-market-irrational-exuberance","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2020\/01\/22\/the-bull-market-irrational-exuberance\/","title":{"rendered":"Bull Markets & Irrational Exuberance"},"content":{"rendered":"

Bob Doll from Nuveen Investments is more bullish on stocks than I am but sets out his thoughts on what could cause the current run to end:<\/p>\n

“Stock valuations are starting to look full, and technical factors are beginning to appear stretched. As stock prices have risen since last summer, bond yields have crept higher. Should this trend persist, it could eventually cause a headwind for stocks. Credit spreads are signaling some risks, as non-energy high yield corporate bond spreads have dropped to multi-decade lows.<\/p>\n

As such, we think stocks may be due for a near-term correction or consolidation phase. Nevertheless, we expect any such phase to be mild and brief as long as monetary conditions remain accommodative and economic and earnings growth holds up. In other words, although we see some near-term risks, we don\u2019t think this current bull market is ending.<\/p>\n

That raises the question of what might eventually cause the current cycle to end. We see three possibilities. First, recession prospects could increase significantly. We see little chance of that happening any time soon, given solid economic fundamentals. Second, a political disruption like a resurgence in trade protectionism could occur. We also don\u2019t think that is likely to happen, especially in an election year. Third, bond yields and interest rates could move higher as economic conditions improve, creating problems for stocks. This one seems like a higher probability, and we\u2019ll keep an eye on it.”<\/p><\/blockquote>\n

Economy<\/h3>\n

The upsurge in retail sales and housing starts<\/a> may have strengthened Bob’s view of the economy but manufacturing is in a slump and slowing employment growth could hurt consumption. The inverted yield curve is a long-term indicator and I don’t yet see any indicators confirming an imminent collapse.<\/p>\n

\"Treasury<\/p>\n

I rate economic risk as medium at present.<\/p>\n

Political Disruption<\/h3>\n

US-China trade risks have eased but I continue to rate political disruption as a risk. This could come from any of a number of sources. US-Iran is not over, the Iranians are simply biding their time. Putin’s attempted constitutional coup in Russia. China-Taiwan. Libya. North Korea. Brexit is not yet over. Huawei and 5G are likely to disrupt relations between China, the US and European allies, with China threatening German automakers<\/a>. Europe also continues to wrestle with fallout from the euro monetary union, a system that is likely to eventually fail despite widespread political support. Impeachment of Trump may not succeed because of the Republican majority in the senate but could produce even more erratic behavior with an eye on the upcoming election. Who can we bomb next to win more votes?<\/p>\n

Bonds & Interest Rates<\/h3>\n

I don’t see inflation as a major threat \u2014 oil prices are low and wages growth is slowing \u2014 and the Fed is unlikely to raise interest rates ahead of the November election. Bond yields may rise if China buys less Treasuries, allowing the Yuan to strengthen against the Dollar, but the Fed is likely to plug any hole in demand by further expanding its balance sheet.<\/p>\n

Market Risk: Irrational Exuberance<\/h2>\n

The market is running on more stimulants than a Russian weight-lifter. Unemployment is near record lows but Treasury is still running trillion dollar deficits.<\/p>\n

\"Federal<\/p>\n

While the Fed is cutting interest rates.<\/p>\n

\"Fed<\/p>\n

And again expanding its balance sheet. More than twelve years after the GFC. The blue line reflects total assets on the Fed’s balance sheet, mainly Treasuries and MBS, while the orange line (right-hand scale) shows how shrinking excess reserves on deposit at the Fed have helped to create a $2 trillion surge in liquidity in financial markets since 2009. Even when the Fed was supposedly tightening, with a shrinking balance sheet, in 2018 to 2019.<\/p>\n

\"Fed<\/p>\n

The triple boost has lifted stock valuations to precarious highs. The chart below compares stock market capitalization to profits after tax over the past 60 years.<\/p>\n

\"Market<\/p>\n

Ratios above 15 flag that stocks are over-priced and likely to correct. Peaks in 1987 and 2007, shortly before the GFC, are typical of an over-heated market. The Dotcom bubble reflected “irrational exuberance” \u2014 a phrase coined by then Fed Chairman Alan Greenspan \u2014 and I believe we are entering a second such era.<\/p>\n

Recovery of the economy under President Trump is no economic miracle, it is simply the triumph of monetary and fiscal stimulus over rational judgement. Trump knows that he has to keep the party going until November to win the upcoming election, so expect further excess. Whether he succeeds or not is unsure but one thing is certain: the longer the party goes on, the bigger the hangover.<\/p>\n

William McChesney Martin Jr., the longest-serving Fed Chairman (1951 to 1970), famously described the role of the Fed as “to take away the punch bowl just as the party gets going.” Unfortunately Jerome Powell seems to have been sufficiently cowed by Trump’s threats (to replace him) and failed to follow that precedent. We are all likely to suffer the consequences.<\/p>\n","protected":false},"excerpt":{"rendered":"

Bob Doll from Nuveen Investments is more bullish on stocks than I am but sets out his thoughts on what could cause the current run to end: “Stock valuations are starting to look full, and technical factors are beginning to appear stretched. As stock prices have risen since last summer, bond yields have crept higher. … <\/p>\n

Continue reading “Bull Markets & Irrational Exuberance”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[31,45,46,3761,57,34],"tags":[455,521,4183,4150,1353,1357,1416,4166,4187,3531,4186],"class_list":["post-19664","post","type-post","status-publish","format-standard","hentry","category-the-fed-banks-interest-rates","category-debt-levels","category-deficit-spending-employment","category-gdp-and-activity","category-stock-markets","category-us-canada-countries-regions","tag-bob-doll","tag-bull-market","tag-corporate-profits-after-tax","tag-fed-balance-sheet","tag-fed-funds-rate","tag-federal-deficit","tag-fiscal-stimulus","tag-market-cap","tag-monetary-stimulus","tag-unemployment","tag-yeld-curve"],"yoast_head":"\nBull Markets & Irrational Exuberance - the patient investor<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Bull Markets & Irrational Exuberance - the patient investor\" \/>\n<meta property=\"og:description\" content=\"Bob Doll from Nuveen Investments is more bullish on stocks than I am but sets out his thoughts on what could cause the current run to end: “Stock valuations are starting to look full, and technical factors are beginning to appear stretched. 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Trend Index troughs above zero warn of selling pressure, driving up yields. A breakout above 4.5% would offer a target of 5.0%, which is bearish for stocks,\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"10-Year Treasury Yield","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2024\/2024-11-12-tnx.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2024\/2024-11-12-tnx.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2024\/2024-11-12-tnx.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":14952,"url":"https:\/\/thepatientinvestor.com\/index.php\/2017\/03\/14\/equities-could-see-a-setback-but-this-bull-market-isnt-over-bob-doll\/","url_meta":{"origin":19664,"position":1},"title":"Equities Could See a Setback, But This Bull Market Isn\u2019t Over | Bob Doll","author":"ColinTwiggs","date":"March 14, 2017","format":false,"excerpt":"Sensible view from Bob Doll at Nuveen: ....Given evidence of stronger economic growth, we could see the Fed become slightly more aggressive about its rate policies, but probably not to the point that it would derail the equity bull market. On balance, we think the risks are skewed to the\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":15642,"url":"https:\/\/thepatientinvestor.com\/index.php\/2017\/07\/24\/bob-doll-lack-of-infrastructure-stimulus-might-benefit-stocks\/","url_meta":{"origin":19664,"position":2},"title":"Bob Doll: Lack of\u00a0 infrastructure stimulus might benefit stocks","author":"ColinTwiggs","date":"July 24, 2017","format":false,"excerpt":"Bob Doll at Nuveen makes a good point about Trump's failure to get infrastructure spending through the House. Washington, D.C. seems mired in gridlock, despite the fact that Republicans control the House, Senate and White House. No significant economic legislation has been passed, and the optimism from January about health\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":43671,"url":"https:\/\/thepatientinvestor.com\/index.php\/2023\/08\/27\/rising-long-term-yields-impact-on-financial-markets\/","url_meta":{"origin":19664,"position":3},"title":"Rising long-term yields impact on financial markets","author":"Colin Twiggs","date":"August 27, 2023","format":false,"excerpt":"It is uncertain whether we are going to see a soft landing or a hard landing in the next 12 months. Some investors are even betting on no landing at all. While outcomes may be uncertain, there are two things we can count on. First, is that the Fed will\u2026","rel":"","context":"In "Active Investing"","block_context":{"text":"Active Investing","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/investing\/active-investing\/"},"img":{"alt_text":"S&P 500","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-08-25-spx.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-08-25-spx.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-08-25-spx.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":16007,"url":"https:\/\/thepatientinvestor.com\/index.php\/2017\/10\/09\/how-long-will-the-bull-market-last\/","url_meta":{"origin":19664,"position":4},"title":"How long will the bull market last?","author":"Colin Twiggs","date":"October 9, 2017","format":false,"excerpt":"US markets are clearly in a bull phase, with the Dow, S&P 500 and Nasdaq making strong gains. A rising Freight Transport Index highlights the broad up-turn in economic activity. Low corporate bond spreads -- lowest investment grade (Baa) minus 10-year Treasury yield -- and VIX below 15 both reflect\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":56433,"url":"https:\/\/thepatientinvestor.com\/index.php\/2024\/08\/07\/contracting-liquidity-could-spoil-the-recovery\/","url_meta":{"origin":19664,"position":5},"title":"Contracting liquidity could spoil the recovery","author":"Colin Twiggs","date":"August 7, 2024","format":false,"excerpt":"The Japanese Yen found support and stocks enjoyed a slight bounce as less cautious buyers went hunting for bargains. But financial markets are not settled. Corporate bond spreads are widening and Bitcoin broke support at $60K to warn of contracting liquidity. Financial Markets Moody's low investment-grade Baa corporate bond spread\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"Moody's Baa Rated Corporate Bond Spreads","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2024\/2024-08-06-baa.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2024\/2024-08-06-baa.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2024\/2024-08-06-baa.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]}],"_links":{"self":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/19664","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/comments?post=19664"}],"version-history":[{"count":6,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/19664\/revisions"}],"predecessor-version":[{"id":19670,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/19664\/revisions\/19670"}],"wp:attachment":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/media?parent=19664"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/categories?post=19664"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/tags?post=19664"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}