On Memorial Day, U.S. markets were closed, prompting reflection on the current economic landscape. Through our Economic Prism, we discern troubling signs that suggest the end of the bull market may be imminent. While the market’s resilience is surprising, the evidence indicating an impending downturn is compelling.
We’ve explored several indicators, such as stock valuations and historical bull market durations. As we navigate these turbulent waters, it becomes increasingly apparent that corporate earnings are on a downward trajectory.
Despite these signals, stock prices continue to climb higher and longer than we could have anticipated. It’s almost unbelievable.
Is it conceivable that we exist in a reality where there’s only an upside and no risks? That notion defies logic.
Every day that the bull market persists brings it closer to an inevitable conclusion. Furthermore, the higher the stocks rise, the steeper the decline will be when it finally occurs. Here’s further evidence that suggests the bull market’s days are numbered…
Margin Debt Declines
As noted by Steve Russolillo in the Wall Street Journal, “Risk-taking in the stock market is demonstrating signs of cooling.”
The New York Stock Exchange’s April figures show that margin debt—the amount investors borrow against their brokerage accounts—fell for the second consecutive month, dropping to $437.2 billion. This figure reflects a 6.1 percent decrease from the record high of $465.7 billion in February, marking the lowest level since November.
Historically, major peaks in margin debt in 2000 and 2007 preceded significant market downturns. If you recall, those subsequent declines were remarkable.
Following its peak of 1,527 on March 27, 2000, the S&P 500 experienced a staggering drop, bottoming out at 1,200 on October 9, 2002, reflecting a total decline of 49 percent. This was merely the precursor to further declines that followed the market reaching new highs.
On October 9, 2007, the S&P 500 stood at 1,565, but by March 9, 2009, it had plummeted to 677, representing a 57 percent drop. Since then, the S&P 500 has ascended continually, surpassing 1,900. What should we make of this?
When will the Stock Market Bubble Burst?
It’s possible that the S&P 500 could reach even greater heights. Market forecaster Jeremy Grantham seems to think so…
In his latest quarterly letter, Grantham shared several forecasts for the coming two years. He suggests that the bull market “probably will not end for at least a year or two and likely not before it reaches a level exceeding 2,250 on the S&P 500.” However, he warns that trouble looms ahead…
“Around the time of the election [2016 presidential election] or shortly thereafter, the market bubble will burst, as bubbles invariably do, reverting to its trend value, which could be around half of its peak—or worse—depending on the Fed’s new interventions.”
Consider this information carefully. Grantham has a history of accurately predicting market peaks, which lends credibility to his assessments.
At Economic Prism, our focus is pragmatic. We prioritize the preservation of capital over mere profit-making, aiming to avoid significant losses that could derail retirement plans by a decade or more. Presently, with the S&P 500 at 1,900 and Grantham’s anticipated peak at 2,250, we see a potential upside of 18 percent against a daunting 50 percent downside.
Indeed, now is not the moment to aggressively buy stocks. With the exception of your most conservative investments, the time has come to accumulate cash for an opportune buying moment. Exercising patience may ultimately be highly rewarding.
Sincerely,
MN Gordon
for Economic Prism
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