August 2, 2019

Probably not. 

But it isn't far away.

It's been an ugly week, but we've seen uglier. Market down 5 of the last 7 days. But we're only 2.4% below the most recent high water mark. In the Grand Scheme, that's nothing. I expect the bulls to mount another charge and once again take the high ground. But let's face it - this bull is tired. It needs fuel (a catalyst) if it's going to keep going higher. I don't see a catalyst out there. Do you? Leave a comment below if you do.

The Fed Cut Rates

The bulls got their wish when the Fed cut interest rates, so why did the market sell off? I think it's because they were expecting a bigger cut, and they had priced that in to the recent rally to new highs. After the rate cut was announced, there was nowhere to go but down. Buy on the rumor and sell on the news.

Trump Just Escalated the Trade War with China

Is Trump playing a game of chess with Xi, while Xi is playing a game of checkers? Or is Xi playing 3-dimensional chess? The market has weighed in and it appears to believe the latter case.  Can 100 million investors be wrong? Sure, but not likely.

The Global Economy is Slowing

The most recent report on U.S. GDP growth was disappointing. When you tune out the political spin, you get to the facts. Growth came in weaker than expected this quarter, and the revisions to previos quarters were negative. Even China's growth is weak - barely above the pace required to support employment and corporate earnings. 

Earnings Estimates Are Dropping

zacks earnings trends 07-31-19

The above chart from Zacks Investment Research illustrates the declining trend of analysts' earnings expectations for the 3rd quarter. Not very encouraging, IMO. And not supportive of a healthy bull market in stocks.

​The Debt Bubble

The U.S Congress just passed a massive 2-year spending bill that Trump is expected to sign into law. There are two camps on this issue. The "deficits don't matter" camp, and the "fiscal responsibility" camp. Which camp are you in? 

As of today the U.S. National Debt is $22.5 trillion dollars. The interest on that debt is $675 billion dollars per year. How significant is that expense? It's the 3rd largest budget expense after social programs and defense spending. And it's quickly gaining ground.

Two Charts On Our Debt Servicing Burden

debt service 1
debt service 2

Final Thoughts

This ageing bull market could go on for several months or even longer. But the smart money is positioning their portfolios to include the chance that a recession and bear market are closer than the optimists assume.

I frequently poll the smart money (my contacts on trading desks, portfolio managers, analysts, and market strategists who I've known and worked with for many years) and they tell me that risks are high and playing smart defense is called for.

As Bob Dylan once said, "Don't Say I Didn't Warn You When Your Train Gets Lost."  

About the author 

Erik Conley

Former head of equity trading, Northern Trust Bank, Chicago. Teacher, trainer, mentor, market historian, and perpetual student of all things related to the stock market and excellence in investing.

  1. As mentioned many times now. Low rates allow for high PE amounts.

    2% fed funds and less than 2 % 10 year treasury = 50 PE

    So even if profits drop a bit the high PE will keep the market up. Profits have to drop a lot to have a recession. Not happening now. The consumer is flush with cash and spending. The really smart money knows this and they buy the dips.

    All the smart people you talk to do not seem to know this….we will see

  2. I respectfully disagree with your premise, Howard. Low rates do not justify high P/E ratios. Are you seriously saying that a 50 P/E is justified by today’s low rates? I beg to differ. Low rates allow companies to issue cheap debt so they can buy back stock and thereby boost their stated EPS. But it’s an illusion. Earnings growth that is artificially manufactured by stock buybacks are not sustainable.

    When rates rise, these companies will incur ever increasing interest expenses. Money isn’t free, but when it comes to juicing your stock price in order to boost your performance bonus, low rates are like manna from heaven for the folks in the C-Suite.

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