Sarah says we are half way through the recent bull run. That is what the charts are telling us. And we are entering the best half of the year for stocks. So I have been asking myself the question, what might stop this bull run and when? Here are my thoughts...
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Since I believe the market's great run since 2009 has been driven by global central bank money printing to by financial assets, I have to also believe when they stop this extreme policy the markets would give a lot of their gains back. Are they about to stop? Never in Japan. The ECB extended their program yet again. The US is starting to sell their balance sheet but it is so tiny now compared to the buying in Japan and ECB it might not matter. So I do not see this ending over the favorable season for equities.
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The market has been boosted by talk of the tax cuts and although I think they would be very negative for the economy in the long run, as long as they keep talking about them the markets appear to like it. Of course, markets often buy the news, sell the event so there might be a pull-back if passed. There should be a pull-back when it becomes evident they can't really cut taxes without massive fiscal cuts which is like fiscal braking instead of stimulus. Hard to say how and when this will play out. Some parts of the plan would temporarily help boost the corporate buybacks which might extend the bull until next summer.
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I think interest rates are going to go up faster than the market is assuming. When interest rates breakout into an uptrend, this will be negative for both bonds and the stock market. This could happen before next Spring. The Fed is pushing a new measure for inflation that justifies raising rates faster. I touched on it here - https://report.tspsmart.com/2017/10/25/look-ma-no-inflation/. By this new measure, inflation is running at above target 2.3% and climbing. I think the Fed wants to slow down the financial bubbles and needed more justification, so they rolled out this new inflation gauge. Tax cuts would accelerate this process.
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The one event keeping me up at night is North Korea. If you are not worried, you are not paying attention. If NK denotes an above ground nuke in the Pacific, the market might wake up slowly to the threat. If they demonstrate they can bring America to its knees with a simple high altitude EMP nuke over the pacific, then the markets might tumble. And this reason alone, is enough for me to recommend *not* holding a 100% position in stocks over the next year.
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Missing out on a stock market melt-up is not desirable. But getting locked into a crash would not be good either. My primary advice is to keep some of your powder dry in the G fund. Rising interest rates would be negative for the F fund and the securities come with default risk.
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Michael Bond
from
TSPsmart.com
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Posted by: Michael Bond <michaelhbond@yahoo.com>
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