What Explains the 2019 Stock Market Party?
Stock prices rebounded nicely in most economies, including the USA:
The large drop of oct-nov 2018 was caused by 3 things:
- Trade tensions between the USA and China.
- The US Government “shutdown” drama.
- Monetary tightening.
These 3 items were “priced into” stock indices… and they are all fading away, so we are returning to the pre-drop level of Sept 2018. Is there much gaz left in the tank?
As I explained on many occasions during 2018, I expected the global “monetary tightening cycle” to be short lived, and indeed I think it’s over. Economies are slowing globally: Europe, Japan, China, and even the USA and Canada have signs of slowing and inflation has limited upside, which means policy interest rates also have limited upside. Trade tensions are all huff and puff and will fade away, as is the repeated sequel of the US budget drama, which is becoming a big joke every passing year.
So the DOW and S&P500 are back at their previous peaks… they are now quite pricey:
The ratio has only been higher than it currently is in 1929 and during the dotcom bubble.
Now for Buffet’s favourite indicator: total stock market capitalization-to-GDP:
Extremely high…
Stocks have been fuelled by:
- Low interest rates that allowed massive borrowings to finance stock buybacks.
- The Trump corporate tax cuts, which boosted profits, which were also used for stock buybacks.
For 2019–2020, we will likely have stable interest rates (although I expect the next policy move to be a CUT of interest rates, but central banks will hesitate to do this to avoid sending a “panic” signal), a fading of the year-on-year effects of tax cuts and government spending, and a maxed out economy in most countries worldwide (most countries are close to their “potential production” level), with unemployment rates having nowhere to go but up.
There is very limited upside to the US stock market going forward… Is it a “stock bubble” or a permanently high “plateau”? I don’t know, but with what is coming for the next 1–2 years, I see at best limited upside and at worst very large downside potential. If Trump is elected President in 2020 AND Republicans regain control of Congress, THEN there will be more tax cuts and more partying for 4 years, but that remains to be seen…
Pascal Bedard
pbeconomiste@gmail.com
