Friday, February 24, 2017
Stock Market Overview
There are multiple warning flags, including confirmation from our various technical and economic business cycles, indicating that the multi-decade bull market in stocks could be in the process of ending, possibly in the very near future.
One of the warning flags is the level of margin debt on the New York Stock Exchange, which are the loans that banks and brokerages make to investors, while using their stock and bond holdings as collateral.
In November 2016, margin debt reached all time highs of $507 billion, and has been hovering close to those levels for the past few months -- illustrating the fact that the market is addicted to debt.
There is precedent for a high level of margin debt preceding a stock market collapse. It peaked in March 2000, just before the stock market top and a subsequent 49% decline. And, it peaked again in July 2007, a few months before the market top in October 2007, which saw a stock market decline of 57%.
Furthermore, the percentage rise in margin debt over the latest bull market is 193%, exactly the same increased from 2002 to 2007, when the financial crisis began and a subsequent major stock market decline.
The problem with margin debt is that it causes a cascade effect -- as the markets fall, investors get margin calls on their loans and have to sell stocks as well as other investment vehicles like real estate, to maintain their margin-to-equity minimum requirements.
As long as the stock market is going up, margin tends to go up as well, which, unfortunately, is exacerbated to the downside in bear markets.
Another warning flag, previously mentioned in our January 27th 2017 Wavetech's Private Wealth Management Newsletter Blog," is the Federal Reserve's quantitive easing stimulus, and corporate stock buybacks programs have artificially supported the global stock markets for the last few years; however, their effectiveness is diminishing or no longer exist.
Economic conditions are vastly different today, with the new Trump administration, compared to the beginning of the 1982 bull market in stocks, through the Regan era.
For example, Reagan had virtually no government debt ($1 trillion or 6% of GDP), the flexibility and effectiveness of lowering interest-rates, as well as reducing tax rates, resulting in strong economic growth, between 6% to 8%.
Trump, on the other hand, has inherited vast amounts of government debt ($20 trillion or 105% of GDP), and already low interest rates. Additionally, lowering tax rates even further may create some short-term growth, but will not reduce the already-ballooning level of government debt. There is fierce opposition in the US House and Senate for raising the debt ceiling limit, which will have to be voted on in mid-March 2017. These reasons and other uncertainties are making either a economic recession or depression an eventual reality.
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Posted by Private Wealth Management at 5:46 PM