No doubt about it — the U.S. stock market is still firing on all cylinders, as the number of naysayers who say a market slide is imminent grows.
Consider these attention-getters:
— The Standard & Poor’s 500 index is up 15.8 percent on a year-to-date basis.
— The Dow Jones industrial average is up a whopping 4,500 points since the 2016 U.S. presidential election.
— The bull market in stocks stretches back to March 2009, as the U.S. began the long climb out of a massive economic downturn. That makes the current bull market 104 months of age.
[See: 7 ETFS for a Solid Portfolio Defense.]
What, if anything, can stop the current bull market in its tracks? We asked several Wall Street gurus what market-stoppers are in play right now that could slow or eliminate market growth.
An overseas push. “I see a strengthening U.S. dollar over the next six-to-12 months, which supports opportunity in non-U.S. stocks,” says Andrew Zimmer, stock market expert and certified investment management analyst at the Wharton Business School at the University of Pennsylvania. “In conjunction, the Bank of England raised rates for the first time in 10 years and European stocks are finally reaching new highs of the last 10 years due to strong growth data.”
While this is unlikely to “upend” the U.S. market, Zimmer says, investors are diligently searching for opportunity anywhere and this means more inflows to non-US stocks from realizing gains in their U.S. portfolios.
“All in all, I see U.S. stock growth slowing as the attractive opportunity is overseas,” he says.
The market is topped out. “Corrections and crashes are unpredictable in terms of exact timing, but there are some indicators that help us understand where we are in relation to other market drops and if we should be more cautious,” says Dan Thompson, owner and founder of Wise Money Tools and Becoming Your Own Bank, and a financial advisor for 32 years.
Thompson points to the Shiller price-earnings ratio, which is currently at 31.47.
“In 1999-2000, when the Shiller Index hit its highest mark ever, due to the internet craze, the index stood at 44,” he says. “There’s no question we are flirting with all-time highs, and have been for this past year.”
Thompson says there are many active money managers with their finger on the trigger, and who are “not willing” to lose eight years of growth to another stock market like 2008, and will bail out at the slightest indication of a drop.
“That, of course, will be a self-fulfilled prophecy and others will follow suit,” he adds. “Realistically, we are long overdue for some kind of correction, however, euphoria can be a driving factor, so caution for new investors would be wise.”
[See: 7 Stocks That Could Save Your Portfolio.]
Too much risk. The stock market is at the tail end of a momentum cycle which has created a dangerous bubble where the risk-return ratio has become untenable for investors, says David Winters, CEO of Wintergreen Advisers and portfolio manager of Wintergreen Fund.
He also says investors have already started transitioning to value investing using fundamental analysis.
“Stock market performance has been highly concentrated,” Winters says. “If you look closely at the performance of the stock market, you see that 10 momentum stocks have been responsible for most of the recent gains.” Alphabet ( GOOG, GOOGL), Amazon.com ( AMZN), Apple ( AAPL), eBay ( EBAY), Facebook ( FB), Microsoft Corp. ( MSFT), Netflix ( NFLX), Priceline ( PCLN), Salesforce ( CRM) and Starbucks Corp. ( SBUX) have gained an average of 29 percent in 2017 and have contributed almost a third of the total index return since the end of 2014, Winter says.
“Even many active mutual funds have fallen into the index trap, with the lion’s share of their holdings mirroring the composition of the major indices,” he says. “In their rush to improve short-term performance they have abandoned their investment discipline and put their capital at risk.”
Valuations on an upward move. The biggest roadblock to stock market growth going forward are high valuations, says Lyn Alden, founder of Lyn Alden Investment Strategy, in Atlantic City, New Jersey. “The cyclically adjusted price-to-earnings (CAPE) ratio of the S&P 500 is well over 31, which puts it above where it was in 1929 and now lags only the late 1990s dot-com bubble as the second-highest period of valuation in a century,” Alden says.
“Additionally, the S&P 500 price-to-book ratio has risen over 70 percent in just the last five years. In other words, stock market valuations have gone up far faster than actual company equity. This doesn’t mean stocks can’t finish 2017 higher than they are now, but it’s pretty clear that we’re in borderline bubble territory.”
Corporate debt climbing. Another big roadblock to stock market growth is corporate debt, Alden says.
“JP Morgan’s most recent ‘Guide to the Markets’ stated that corporate debt as a percentage of GDP has reached 45 percent,” she says. “This is at the highest time in recent history, and considerably higher than back in 2011 when corporate debt reached a low point.”
Over the past several years, corporations have been taking advantage of low-interest rates to buy back large numbers of their own shares, which accelerates their earnings per share growth, Alden adds.
“But as corporations are reaching high levels of leverage, this is already tapering off,” she says. “Corporations are buying back less stock in 2017 than they did in 2016. This may slow corporate earnings growth going forward and make the high valuations increasingly difficult to justify.”
[See: 10 Ways for Investors to Buy the Market.]
There does seem to be a shift in sentiment among Wall Street money managers that the epic, almost decade-long U.S. stock market run is coming to an end. The red flags are growing, they say, and investors need to start exercising caution to keep a firm grip on abundant market gains.
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5 Potential Roadblocks to Stock Market Growth originally appeared on usnews.com
