The stock market seems to be back on its upward path. The S&P 500 has risen above its 200-day moving average and is now less than 50 points shy of its all-time high near 2,131.
The fleeting panic observed in August and September may soon be nothing more than a minor detail on the price chart—a momentary setback from which stocks rebounded, coiling and then launching to new highs. Enthusiasts of the “buy the dip” strategy will likely reference this moment for validation.
Currently, stock valuations are nearing historical highs. Regardless of the metrics used—whether it’s Shiller’s Cyclically Adjusted Price Earnings (CAPE) ratio or the Buffett indicator—it’s clear that stock prices are significantly overvalued. This reality seems to be largely overlooked at present.
Additionally, treasury yields, which move inversely to prices, are languishing at the bottom of a debt cycle that has spanned over three decades. When yields eventually rise, they could continue to do so for the next two decades. This shift will result in declining asset prices, as borrowing costs will increase.
This is a trend reversal that has been gradually building. However, it has yet to manifest fully. For now, cheap credit and inflated asset prices reign. Perhaps a final surge and euphoric peak are necessary before the bull market ultimately settles.
A Decade of Flailing
Despite the stock market’s ascent, the global economy is faltering. For instance, the Commerce Department announced on Tuesday that new orders for durable goods fell by 1.2 percent in September, marking the second consecutive monthly decline.
Consumer confidence is also dwindling. The Conference Board’s Consumer Confidence Index dropped to 97.6 in October, with the Board indicating that consumers are anxious about the job market—a valid concern.
Major corporations are struggling to maintain profitability. Quarterly earnings and revenues for S&P 500 firms are on track to decline simultaneously for the first time in six years, reminiscent of the darkest days of the Great Recession. This may be a reflection of an economy that is coming to a standstill.
For example, the Bureau of Economic Analysis recently reported that GDP grew at a mere 1.5 percent from July through September, a decline from 3.9 percent in the prior quarter. Moreover, the personal consumption expenditures price index only increased by 1.2 percent during this time, down from 2.2 percent in the second quarter.
This kind of sluggish growth is insufficient to alleviate significant debt burdens. Even with slight inflation, the U.S. GDP is unlikely to exceed 3 percent annual growth for the tenth consecutive year. In fact, the last time the U.S. economy achieved above 3 percent growth was in 2005.
The Exhilarating Romp to DOW 30,000
This is the environment we inhabit—a world of slow and even declining economic growth. Though the changes may seem gradual day by day, they become stark revelations over a few months.
Manufacturing and corporate earnings are down, consumer confidence has dipped, and GDP is teetering on the edge of negative growth.
Given these disheartening economic indicators, one might justifiably approach the high stock market with caution. Yet, it’s important to remember that the stock market often operates on illogical premises. When immense monetary interventions are at play, the situation becomes even more unpredictable. Indeed, we might witness even more unforeseen price fluctuations.
Monetary policy is being employed to spur demand and invigorate the economy. Recently, the European Central Bank reiterated its commitment to creating money to purchase European debt. Simultaneously, China has reduced its benchmark interest rate for the sixth time within a year, while the Federal Reserve has extended its zero interest rate policy for yet another month, hinting at a potential rate increase in December.
Despite what central bankers and advocates for stimulus may believe, additional monetary interventions are unlikely to generate genuine economic growth. The past seven years have demonstrated this reality, as the economy has fluctuated erratically. While further monetary stimulus may not revive the economy, it will likely contribute to distorting stock prices and inflating asset bubbles.
So brace yourself—both for the market and your finances. We may be in for an extraordinary ride. Will we see DOW 20,000? Or perhaps even DOW 30,000?
The answer remains uncertain. However, the experience promises to be exhilarating, albeit fraught with challenges.
From our perspective, hitting DOW 30,000 should not be met with celebration. This benchmark will not symbolize a thriving, healthy economy. Instead, it will reflect the sheer irrationality and folly of global central banking strategies, laying the groundwork for an inevitable significant market correction.
Caveat emptor – let the buyer beware.
Sincerely,
MN Gordon
for Economic Prism
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