The major stock market indices are at record highs. Why would there be anything to worry about?
Well, the only major buyer of stocks over the past 8 years has been companies buying back their own stock. The other traditional buyers, such as institutions, foreigners, households, have been either sellers or very small buyers.
As I will elaborate on in our new video presentation, this year, six stocks have produced 40% of the gains of the S&P 500. It doesn’t take much manipulation to push up six stocks. These are the FAANG, plus Microsoft.
S&P 500 earnings have declined for almost three years while the indices go to new highs. That’s abnormal.
Since 2012, S&P 500 earnings have gained only 12%, while the S&P 500 gained 80%.
Complacency is at an all-time high, financial leverage is at the highest in history, while volatility is at an all-time low, which causes the quants to increase leverage even further. It’s all mathematical.
This is the perfect combination seen at many market tops in the past. But the amplitude of these extremes is at a historic high. Margin debt in stock accounts is at an incredible $540 billion. Student loans are at $1.4 trillion, many of them in default. And the worst, leverage in the financial system is over 370% of GDP.
All this means that when the recession and bear market finally start, the consequences should be much worse than what we saw in 2008, or year 2000.
So what could turn this eight year bull market, where the major indices are now at all-time record highs, into a bear market? There are actually two major factors, and a number of minor items.
According to my theory developed over 40 years ago, when I founded Dohmen Capital Research, ‘Liquidity and credit’ are the primary determinants of investment market trends. When liquidity and credit are expanding, it is bullish for stocks. When they contract, stock markets decline.
It’s that simple. You don’t have to look at dozens of economic statistics. They are just an effect of a change in the liquidity and credit. Keep your eye on the cause.
We will be examining the incredibly complacent, and fragile, financial markets in our exclusive new video presentation, available starting today. We will go more in depth explaining our latest forecasts for the markets in the Fall season, typically the most volatile time for investors and traders. Make sure to secure your spot today as availability is limited! Visit http://bit.ly/DCRVP2017 to learn more.
We hope to see you there, as this could be the most important 1 hour and 40 minutes you spend preparing your own portfolio for the coming months. For a preview of what you can learn in this new presentation, please view the slides below: