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Fri12152017

Last updateSat, 29 Jul 2017 12am

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What will stop US markets’ Bull?

Dow Jones Industrial Average, S&P 500 had broken its record again and again, surpassing its previous high.  Nasdaq for the first time since the euphoria of the tech bubble, rose above 4,000!  At the moment, it seems that nothing could stop the “bull” in US market.  In investment trend is our friend, but with market this hot, it would good to know what would reverse the trend.

Henny Sender’s Financial Time article -  pointed out that “At this odd moment in time, the US markets are the beneficiaries of two contradictory trends: one is today’s reality and the other is tomorrow’s expectation.”  Unfortunately, neither of them has anything to do with economic fundamentals.  What it meant is – this rally is not “real” as it is not supported by the ‘real’ fundamental of the economics.

The first beneficiary – Today’s reality.  Yes, the reality today is the Fed is still printing monies to the markets, driving asset prices ever higher.  The second beneficiary – Tomorrow’s expectation.  Accordingly, the incoming Chairman of the Fed – Janet Yellen is even more committed to quantitative easing than the current occupant of the seat Ben Bernanke.  As a consequent, the act of tapering would mean a stronger dollar and an expectation of improved “fundamentals”, and translate to perhaps corporate spending on plant and equipment…resulting in driving the market up with PE gone from 14X at the end of last year to almost 17X (2007 again).

To Christopher Woods, analyst of CLSA, it is the threat of deflation due to the continuation of the disconnection between the rising prices of financial assets and the real economy. 

Most important to take note is – the real incomes of most of the population have not risen at all.  Apparently, the only beneficiaries of QE are the very wealthiest.  Question is can their spending be enough to support the real economy?  In a world where demand will probably be weaker tomorrow than it is today, can asset prices rise indefinitely?

Obviously not. For now, it appears the majority is still indulging itself in the bull mood…As the majority is awakened by the hard facts, the Bull would probably reverse its course. 

Reference:

Financial Times, Henny Sender, 2013-11-29, “Runaway stocks approach rally’s end point”