Reckless forecast: anticipate a greater than 20% run up in securities in 2018 and possibly again in 2019 with a greater than 40% correction near the end of 2019.
1/23/2018
If you've read what I've written regularly, you'll notice that the majority of my writings occur around bubbles, crashes, rebounds, and this is no exception.
I believe the current bull run will last at least until June 2018 and expect at least a 20% overall gain (but probably 40 and up to 60%) before a correction. If this melt-up is long, indicators of that correction should become apparent by late 2019 to early 2020 (and probably well before). Since the American housing market is heavily linked to the American Stock market it will also be affected. So if you're worried about high home valuations just save your pennies.
The correction should erase most of the gains since approximately 2016 (2150 S&P).
Indexes (30, 180 day looks)
VIX: 10.88 (+9.9%, +16.13%)
TED: 27.8 (37.58, 17.4)
S&P500: 2840 (2680, 2470)
S&P 500 Target: 2018-9: 3408 to 4000, 2020: 2150
Valuation Ratios
Higher than they've been, objectively. The rising rate of average PE is impressive at 26.52 in 2018. Just look at it (from Shiller & the above link):
The (Inflation adjusted) Shiller PE is even better:
For context historic median is 16.15 for the latter and 14.69 for the former.
A few more charts, just for fun. The price to book ratio, a personal favorite:
Why not the Inflation adjusted S&P500:
The recovery has been generous despite (or more likely because of) the gutting of the consumer protection agency and Dodd-Frank. But this means nothing has really changed and the rebuilding of a bubble was/is inevitable, maybe this next time will spur us to actually have some intelligent regulation - but probably not. Here's your chance to profit at Wall-street's misfortune, get that money main street!
My Thoughts
If there is a run up as well as new High water marks for corporate deals including Mergers & Acquisitions (M&A) a bursting is inevitable. While the eminent Mr. Smith believes that Trump's appointment to the Fed Chair will continue a low interest rate environment that will only speed a down turn, I believe this tact is madness. The repatriation of billions in overseas corporate gains as a result of the Trump Tax cuts will just add more liquidity to an environment that's already been pumped full of cash. This is important to bubble formation as a large cash infusion is needed to race to the tipping point. The melt-up will encourage greedy financial institutions to more heavily leverage their portfolios and investment banks are likely to again become embroiled in the madness. In my opinion the Fed will be forced to raise interest rates to prevent the nightmare scenario where the S&P looses 50% of it's market cap, but the more I think about it in this nation of fact-poor narrative-rich idiocracy run by plutocrats, maybe forced is far too strong a term. A right thinking person would be forced by the influx of cash and presumed rising inflation that raising interest rates was the right move to remove money from the economy, but a Trump administration and "independent" Trump Fed... Eh, Mr. Smith may well be right.
So, there's going to be a 20% run up. Time to ride the wave up with Short Term investments & Trades as long as I have the diligence to bail at the first sign of trouble. Some hedges with the Emerging markets will make nice sales after the crash to buy into a down market of Dividend Aristocrats. Failing that, dollar cost averaging always works. Just don't worry about any of this nonsense and keep putting money into the S&P500 every month knowing you'll come out ahead a few years after the crash. But a Market Crash is the ultimate Dip and Flip, as long as you're well positioned to buy when stocks go on sale - and that is challenging.
I don't think employment will be hit as hard as last time, since we haven't seen real wage growth people with jobs will probably keep them as opposed to the 10 to 20% reductions that made headlines previously. Rising inflation will likely see a raise in nominal wages but no real wage growth.
Conclusion
I suppose technically the bubble can be avoided but I doubt we'll have another Glass-Steagall/Bank Act of 1933 and certainly no one but me and Elisabeth Warren are thinking about that option. Raising interest rates would probably curb the losses to a simple 10-20% correction. This would create huge problems for the federal government given Republicans & Trump's massive spending plans - since all the money would have to come from bonds/Treasuries. But that's a problem for another day and the next president who will likely not be a Republican if the drop is significant enough in 2020.
Disney & Coke are pressing questions for me in these scenarios, but given precedent it will likely tank and be good pick ups 3-4 months after the downturn is apparent, I loved them in 2008-9. Twitter will be easier to exit at the top and I'll jettison it without remorse and possibly pick it up a $5 in the aftermath if google doesn't buy it. Goog might be pretty reasonable 6 to 10 months after as well. Lots of options for dollar cost averaging in my future.
Getting to Cash and hedges is likely the safest option overall, but some diligent trades (<1 year) & Short Terms (1-2 years) could be highly profitable.
Where's my surfboard?
Due Diligence - 1929, 1973, 2000, 2008, Glass-Steagal, Dodd-Frank, Case-Shiller home indices.
If you've read what I've written regularly, you'll notice that the majority of my writings occur around bubbles, crashes, rebounds, and this is no exception.
I believe the current bull run will last at least until June 2018 and expect at least a 20% overall gain (but probably 40 and up to 60%) before a correction. If this melt-up is long, indicators of that correction should become apparent by late 2019 to early 2020 (and probably well before). Since the American housing market is heavily linked to the American Stock market it will also be affected. So if you're worried about high home valuations just save your pennies.
The correction should erase most of the gains since approximately 2016 (2150 S&P).
Indexes (30, 180 day looks)
VIX: 10.88 (+9.9%, +16.13%)
TED: 27.8 (37.58, 17.4)
S&P500: 2840 (2680, 2470)
S&P 500 Target: 2018-9: 3408 to 4000, 2020: 2150
Valuation Ratios
Higher than they've been, objectively. The rising rate of average PE is impressive at 26.52 in 2018. Just look at it (from Shiller & the above link):
The (Inflation adjusted) Shiller PE is even better:
For context historic median is 16.15 for the latter and 14.69 for the former.
A few more charts, just for fun. The price to book ratio, a personal favorite:
Why not the Inflation adjusted S&P500:
The recovery has been generous despite (or more likely because of) the gutting of the consumer protection agency and Dodd-Frank. But this means nothing has really changed and the rebuilding of a bubble was/is inevitable, maybe this next time will spur us to actually have some intelligent regulation - but probably not. Here's your chance to profit at Wall-street's misfortune, get that money main street!
My Thoughts
If there is a run up as well as new High water marks for corporate deals including Mergers & Acquisitions (M&A) a bursting is inevitable. While the eminent Mr. Smith believes that Trump's appointment to the Fed Chair will continue a low interest rate environment that will only speed a down turn, I believe this tact is madness. The repatriation of billions in overseas corporate gains as a result of the Trump Tax cuts will just add more liquidity to an environment that's already been pumped full of cash. This is important to bubble formation as a large cash infusion is needed to race to the tipping point. The melt-up will encourage greedy financial institutions to more heavily leverage their portfolios and investment banks are likely to again become embroiled in the madness. In my opinion the Fed will be forced to raise interest rates to prevent the nightmare scenario where the S&P looses 50% of it's market cap, but the more I think about it in this nation of fact-poor narrative-rich idiocracy run by plutocrats, maybe forced is far too strong a term. A right thinking person would be forced by the influx of cash and presumed rising inflation that raising interest rates was the right move to remove money from the economy, but a Trump administration and "independent" Trump Fed... Eh, Mr. Smith may well be right.
So, there's going to be a 20% run up. Time to ride the wave up with Short Term investments & Trades as long as I have the diligence to bail at the first sign of trouble. Some hedges with the Emerging markets will make nice sales after the crash to buy into a down market of Dividend Aristocrats. Failing that, dollar cost averaging always works. Just don't worry about any of this nonsense and keep putting money into the S&P500 every month knowing you'll come out ahead a few years after the crash. But a Market Crash is the ultimate Dip and Flip, as long as you're well positioned to buy when stocks go on sale - and that is challenging.
I don't think employment will be hit as hard as last time, since we haven't seen real wage growth people with jobs will probably keep them as opposed to the 10 to 20% reductions that made headlines previously. Rising inflation will likely see a raise in nominal wages but no real wage growth.
Conclusion
I suppose technically the bubble can be avoided but I doubt we'll have another Glass-Steagall/Bank Act of 1933 and certainly no one but me and Elisabeth Warren are thinking about that option. Raising interest rates would probably curb the losses to a simple 10-20% correction. This would create huge problems for the federal government given Republicans & Trump's massive spending plans - since all the money would have to come from bonds/Treasuries. But that's a problem for another day and the next president who will likely not be a Republican if the drop is significant enough in 2020.
Disney & Coke are pressing questions for me in these scenarios, but given precedent it will likely tank and be good pick ups 3-4 months after the downturn is apparent, I loved them in 2008-9. Twitter will be easier to exit at the top and I'll jettison it without remorse and possibly pick it up a $5 in the aftermath if google doesn't buy it. Goog might be pretty reasonable 6 to 10 months after as well. Lots of options for dollar cost averaging in my future.
Getting to Cash and hedges is likely the safest option overall, but some diligent trades (<1 year) & Short Terms (1-2 years) could be highly profitable.
Where's my surfboard?
Due Diligence - 1929, 1973, 2000, 2008, Glass-Steagal, Dodd-Frank, Case-Shiller home indices.
