Nobel Prize Winner Confirms My Concerns of Stock Market Vulnerability

Federal ReserveIt’s hard to believe we are nearing the end of another year. It seems as though the move into 2013 was just yesterday. I was bullish at the start of the year, but I was not expecting the kind of stock market advances we have seen with the NASDAQ and Russell 2000 up more than 30% and the S&P 500 nearing that level with multiple record-highs.

Recently, I wrote about the need to ride the current market higher, as the signs point to more upside moves ahead. (Read “Why Stocks Likely to Head Higher into the New Year.”) But at the same time, I remain nervous about the vulnerability of the stock market.

The soft results from what was pumped up as a killer Black Friday failed to materialize, as sales on the Thanksgiving weekend fell 2.7% year-over-year, according to the National Retail Federation (NRF). The NRF did estimate sales during the next few weeks prior to Christmas could rise 3.9%, but while it may pan out, it will only do so because of heavy discounting to clear inventory.

What continues to linger on my mind is the fact that we have yet to see a correction of 10% or more during this four-year bull market, which began in March 2009. This makes me nervous.

Robert Shiller, who was one of three Americans who just won the 2013 Nobel prize for economics, believes there is a bubble in the U.S. stock market, especially given the run-up in stocks in spite of what has been a fragile economic recovery. (Source: Clinch, M., “Nobel Prize winner warns of US stock market bubble,” CNBC, December 2, 2013.)

While I have also been nervous, saying the stock market is vulnerable to a correction, I continue to advise investors ride the gains but take some profits off the table.

The reality is that the climate of easy money pushed by the Federal Reserve has created this stock market bubble. The Fed should be looking at reining in its monthly bond buying. For instance, the Fed should shave $5.0–$10.0 billion off the top in December to begin, to see how the stock market reacts. This would be a way of cutting the stimulus and avoiding the continued build-up of debt. It would also allow the economy to fend for itself a little more, rather than relying on the overblown stimulus. I hope the exiting Chairman Ben Bernanke or incoming Chairwoman Janet Yellen will start the process.

In the meantime, all eyes will be on the November jobs market report to be released on Friday, which will be the most important economic reading for the Fed to look at prior to its mid-December Federal Open Market Committee (FOMC) meeting. There’s a sense that a reading of more than 200,000 jobs created, like we saw in October, could be enough to drive the Fed to begin tapering in December, but I’m not convinced, since the Fed has created a stock market that feels entitled to cheap money—meaning it’s onward ho with quantitative easing (and market gains) for now.