Trump Warns of Stock Market Bubble and Recession
Donald Trump, the rag tag billionaire GOP presidential front runner, who takes a lickin’ but keeps on tickin’, has warned of a stock market bubble on the verge of popping—and a looming recession. (Source: “Trump: Economic bubble about to burst,” The Hill, October 14, 2015.)
Trump also accused Federal Reserve Chair Janet Yellen of propping up the Obama administration by keeping interest rates low. If you believe the economic data coming out of everywhere, low rates are pretty much the only thing keeping America out of a recession/depression during his administration.
While chances are good the Federal Reserve will (finally) raise rates later this year, the increase will be small and calculated. Would you expect anything else? After seven years of keeping interest rates artificially pegged at zero, the last thing the Fed wants to do is shock the fragile American and global economy.
If you believe the Trump conspiracy, what the Fed does want you to do is overlook Obama’s tarnished and largely unfulfilled legacy. Unfortunately, keeping interest rates low has just hurt the savings of the average American and fuelled an underwhelming stock market to eye-watering levels.
With no income on savings, the average American has been forced by the Federal Reserve to dump their hard-earned money into the stock market, propelling it higher. What we have now is a frothy stock market bubble stretched to the limit. That will eventually pop and wipe out the savings of middle America.
It’s pretty hard to practice the so-called American dream when your savings are gone, and that’s not something the average American will be distracted by.
Trump Is Right; Markets Are Seriously Overvalued
The Donald is correct when he says, “we’re in a bubble right now anyway.” The stock market is seriously overvalued and a recession is on the horizon.
According to the Case-Shiller CAPE PE Ratio, the S&P 500 is overvalued by around 68%. The ratio is at 24.78; the average since 1881 has been 17. The only other times it has been higher was in 1929, 2000, and 2007: depression, crash, Great Recession.
The market cap to GDP ratio, or the Warren Buffett Indicator, is at 116.6. A reading of 100 suggests the markets are fairly valued. The higher the ratio is over 100, the more overvalued the stock market. It has only been higher than the current reading once since 1950; that was in 1999.
There Is Nothing Supporting This Bull Market
To keep a bull market going, you need something to drive it higher. We don’t have that—anywhere. According to the University of Michigan Consumer Sentiment Index, consumer confidence is crashing, manufacturing activity is decelerating at a rapid rate, global economic growth is anemic, and a survey by the Federal Reserve Bank of New York says the U.S. is already in a recession.
What has all of this done to the stock market? Tripped it up. The 30-stock strong Dow Jones Industrial Average has broken an uptrend that began in 2009; so, too, have the S&P 500, New York Stock Exchange, and the NASDAQ.
The global economy is a mess with China and other major economics struggling. Keep in mind that approximately half of all revenue from S&P 500 companies comes from outside the U.S. A weak global economy and strong U.S. dollar does not bode well for U.S. stocks.
The writing has been on Wall Street for years. But for some reason, investors are only starting to take notice. Blended earnings growth for the recently completed third quarter is forecast to decline -5.5%. On June 30, the estimated decline for the third quarter was just -1.0%. If the index reports a decline in earnings in the third quarter, it will mark the first back-to-back quarters of earnings declines since 2009. (Source: “Factset Key Metrics,” FactSet, October 9, 2015.)
Why the sharp decline? Weak third-quarter results come at the behest of a strong U.S. dollar, China, the eurozone, and lower oil and gas prices.
The holiday-rich fourth quarter is also looking bleak. On June 30, analysts expected fourth-quarter earnings to climb 4.3%. By the end of the third quarter (September 30), estimated growth had declined sharply to just 0.2%. Right now, it stands at -0.4%. In spite of this, ever-optimistic analysts, somehow, project earnings growth in all four quarters of 2016.
It just doesn’t add up. If Donald Trump can see the markets are in a bubble, analysts should be able to.