PRESSURE!
The degree of “economic policy pressures” now facing the stock market are very comparable to what the market faced just prior to the 2000, 2007-09, and 2022 bear markets.
Like any good physician, investors have to constantly monitor and access numerous symptoms which could suggest rising stock market vulnerability. Except for those formative baby bull years, from middle age onward, every stock market run eventually exhibits a troublesome list of “symptoms”! And as aging Boomers like me know, old retired folks also present a plethora of ailments – those damn arthritic big toes, aggravating lower back, flapping double-chin, and “what’s your name again” … ahh, but enough about me!
The current bull market is nearing its 4th birthday and already exhibits a number of worrisome signs of aging. Many gauges suggest excessively high valuations, both the price and earnings of the S&P 500 index are currently near record levels in relation to trendline norms, concentration within the stock market remains high, and the current intra-correlation between S&P 500 stocks is at historically low levels which often indicates lower future stock market returns. Moreover, during the last year, fueled by recent excitement surrounding AI stocks, high beta stocks have been leading. The AAII survey shows that investors’ portfolio exposure to stocks less cash is near record highs, the degree of defensiveness (measured either by the portion of S&P 500 market capitalization comprised by defensive sectors or by the severe underperformance of low beta stocks) has diminished markedly, the level of private sector cash holdings to GDP has been declining for some time, earnings estimates have become extremely optimistic, companies’ stock issuance has expanded considerably, use of margin debt has been climbing, and aggressive stocks like IPOs, micro caps, and unprofitable small caps and technology stocks have been outpacing the overall stock market.
Yes, symptoms are plentiful surrounding the stock market suggesting it has become more vulnerable. But like aging Baby Boomers, it takes more than just aggravating “symptoms” to shut it down. As regularly demonstrated throughout history, a vulnerable stock market often keeps rising far longer than most anticipate. Traditionally, despite vulnerabilities, the stock market typically perseveres and avoids any meaningful decline until and unless it faces PRESSURE! Symptoms suggest vulnerability, but pressure “causes” stock markets to decline.
What follows is a graphic demonstration that the degree of “economic policy pressures” now facing the stock market are very comparable to what the market faced just prior to the 2000, 2007-09, and 2022 bear markets. While I do not expect a bear market this year, I am guessing that PRESSURE will likely bring a challenging correction.
