In recent times, the stock market has tended to carve out and extended top before the cyclical
bear arrives. The current cyclical bull has basically gone nowhere for two years. So, it gets
tempting ask whether the market is experiencing one of those periodic, lengthy topping periods
now. SPX Weekly
It could be so, but the current period does not fit the the typical lead - in. What is missing of
course is the steady rise in short rates along with progressive flattening of the yield curve that
heralds the onset of a pre - recessionary liquidity squeeze / credit crunch. Some elements of a
problem are there. The Fed zeroed out the growth of its balance sheet and the monetary base
quite some time back and even raised the Fed Funds rate a notch last Dec. Moreover, Fedspeak
is leaning in the direction of another increase before long. But the supply of loanable funds now
provided by the private sector has been steadily growing faster than the demands of the real
economy because of low output growth and nominal inflation. Confident investors have drawn
on the excess liquidity to invest in and trade the capital markets. In addition, history shows that
even when the economy perks up, liquidity and the supply of credit can expand along with it
at least up to a point.
So, it would appear premature to write the market's obituary based on the fundamentals since
the traditional cyclical deterioration of the financial system and rate structure is not in evidence.
However, it remains troubling to me that the stock market and the economy have struggled so
obviously since the end of QE 3 as 2014 closed out, and that the economic system has been
saddled with excess business inventory for such a lengthy period.
For now, bond and stock prices are in softening trends as both markets come off the hefty
overbought conditions of the summer. Market players are seeking to find appropriate price
levels to accommodate another short rate increase. There may also be nervousness as the
election fight comes through the home stretch as well as some trepidation about how Trump
will behave in either victory or defeat.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!