Current stock market valuations are not sustainable. If there is one thing that I want you to remember from this article, it is that cold, hard fact. In 1929, 2000 and 2008, stock prices soared to absolutely absurd levels just before horrible stock market crashes. What goes up must eventually come down, and the stock market bubble of today will be no exception. In fact, virtually everyone in the financial community acknowledges that stock prices are irrationally high right now. Some are suggesting that there is still time to jump in and make money before the crash comes, while others are recommending a much more cautious approach. But what almost everyone agrees on is the fact that stocks cannot go up like this forever.
On Tuesday, the Dow, the S&P 500 and the Nasdaq all set brand new record highs once again. Overall, U.S. stocks are now up more than 10 percent since the election, and this is probably the greatest post-election stock market rally in our entire history.
But stocks were already tremendously overvalued before the election, and at this point stock prices have reached a level of ridiculousness only matched a couple of times before in the past 100 years.
Only the most extreme optimists will try to tell you that stock prices can stay this disconnected from economic reality indefinitely. We are in the midst of one of the most outrageous stock market bubbles of all time, and as MarketWatch has noted, all stock market bubbles eventually burst.
The U.S. stock market at this level reflects a combination of great demand, great complacency, and great greed. Stocks are clearly in a bubble, and like all bubbles, this one is about to burst.
If corporations were making tremendous amounts of money, rapidly rising stock prices would make logical sense.
But that is not the case at all. Corporate earnings for the fourth quarter of 2016 were actually quite dismal, and this disconnect between Wall Street and economic reality is starting to really bug financial analysts such as Brian Sozzi…
The S&P 500 has gone 89 straight sessions without a 1% decline. Considering that Corporate America didn’t exactly light up on the top and bottom lines during the fourth quarter, such a streak is rather troublesome. Granted, the stock market is a forward-looking mechanism that appears to be trading on hopes that Trump’s unannounced stimulus and tax plans will be lifting economic growth in 2018. Even so, the inability of investors to at least acknowledge persistent struggles among companies and ongoing chaos in Washington is starting to become disturbing.
It is a basic fact of economics that stock prices should accurately reflect current and future earnings.
So if corporate earnings are at the same level they were at in 2011, why has the S&P 500 risen by 87 percent since then?
Are you prepared for a short term correction? What will you do when it happens? Are you prepared?
Is President Trump's honeymoon nearing an end?
Well, analysis is not showing that industrial production is rising with the market. It certainly did not turn down because of Trumps election, it's just not following the current hyper-growth of the post election boom.
And below you can see how a presidential change does nothing in terms of immediate results in GDP expectations.
Finally, you can see that the price to sales ratio is at an all time high, even higher than in 2000.
US stocks right now are selling at the HIGHEST price-to-sales ratio in at least 15 years, and far higher than it was before the 2008 crash.
So, are we ready for a crash?
Subscribing to one of our membership plans, we will let you know if and when the crash is going to occur and how large it likely will be. We will help you prevent the loss of a large portion of your current retirement account value. You can do this without sacrificing any long term growth.
Protect your retirement account value increasing its future growth.
That's how we help you.
It is increasingly likely that May or June may be the next target for a FED rate hike. However, keep in mind that we have the French elections coming and that may move the dollar higher as the Euro caves in. The breakup of the EU is gaining momentum and Draghi has been proven to be completely inept in his attempts to manage the European economy. Instead of creating a recovery, he has deepened the divide and brought the EU to the brink of collapse.
Rising Interest Rates
Yellen raising rates is exactly what I warned would happen and precisely why we adjusted our Freedom Portfolios. As the dollar strengthens and Europe looks more questionable, the capital flows move to the dollar creating the appearance of an asset bubble. There really is no asset bubble yet.
Big numbers scare people, but percentages do not. We all want double digit gains, so an increase from $10 to $15 is a nice 50% gain over 3 Years. Well, when you talk about the Dow Jones going from 20,000 to 30,000 it sounds huge! But the reality is that it is the same 50% growth rate. Historically, this is right in line. Nonetheless, there will be a corrective decline so follow your arrows.
Where your money is invested within your retirement accounts does matter!
The mainstream media has declared outright war on Trump. So, as the stock market rises, the media will turn and blame Trump saying he is just making his rich friends richer. This is what will compel the Fed to raise rates more to stop the non existent asset bubble, which in turn will attract more capital to the dollar and send small emerging markets over the cliff.
This is why you must follow our Freedom Portfolio allocation percentages within your 401k and other retirement accounts. Making these adjustments will lower your portfolio risk and allow gains to come rapidly.
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Livio S. Nespoli has been a broker, registered investment advisor, and financial publisher since 1985.