Last Dance

Just a quick note this evening, Sunday, January 10, 2021.

This will probably be my last update to the SuttonWatch blog after posting for almost 8 years.

On Friday, January 8, 2021, almost every major U.S. stock market index closed at a record high:

S&P 500            3,825

DJIA                31,098

Nasdaq Comp  13,202

Massive ongoing global central bank support for the financial markets and a growing anticipation by investors of new meaningful U.S. fiscal stimulus are the two major pillars of bullish support for stock prices here in the U.S. and, for the most part, in global bourses everywhere in recent months.

The Biden Administration will assume control of the U.S. Executive Branch on January 20, 2021, and most investors now expect another Covid-related stimulus package of at least $1.0 Trillion in addition to the latest $908 Billion just executed.

If you are a U.S. shareholder, what's not to like?

While few would argue that when compared to historical norms, current U.S. stock market valuations are high on almost every metric. In fact, valuations have now approached or exceeded the extraordinary valuations witnessed in early 2000 just before the S&P 500 collapsed by 49% and the Nasdaq Composite Index lost 83%.

Tesla, of course, is the poster child of overvalued stocks right now. Tesla's $834 billion market value exceeds the valuations of the 10 largest automobile companies combined. Tesla now trades at 1,742 times trailing 12-month earnings and 223 times forward-looking 12-month earnings.

Nio, a fast-growing startup in the Chinese electric vehicle market, now sports a valuation of $85 billion, which is 37% higher than General Motors!

Ignoring (just for a minute) the negative potential ramifications of the recent failed Trump-related coup attempt in the United States, and ignoring any possibility of continued related unrest over the very near term, is there anything on the horizon that could stop this historic bull market in U.S. stock prices?

I could list at least 10 possible reasons why stocks might correct over the very near term, but one particular reason seems most important to me right now and therefore most likely to represent the catalyst for a meaningful bear market to begin soon. INFLATION !

For the first time in more than 10 years, TIPS are now trading above 2.0%. TIPS are the best measure of the market's expectation for inflation ahead. Long-term Treasury bonds are now down 3.5% for the new year so far, and higher inflation expectations along with massive new supply of Treasury securities on the immediate horizon are the two major reasons for the decline in T-bond prices this past week.

Is TINA dead? Perhaps not, but if meaningful inflation is about to rear its ugly head, as I think is very likely, then TINA will soon die a quick death. TINA, of course, stands for "There Is No Alternative" to stocks in the current environment of zero% short term interest rates as controlled by the U.S. Federal Reserve. With mid-term and longer-term U.S. interest rates now starting to rise, stock investors will soon face headwinds not discounted in current share prices. Yes, there are now alternatives to stocks, and it won't take much to turn current bullish investor sentiment for stocks into a mad rush for the exits! With NYSE margin debt near record highs and with most stock investors "over-weighted" and over-leveraged in U.S. equities, the first down move off the highs could be precipitous!

Thank you for reading these posts over the last 8 years. Please accept by gratitude and thanks. I wish all of you the very best with your investments ahead!

Thank You Chairman Powell

The Federal Reserve on Thursday (April 9th) announced unprecedented monetary stimulus actions to provide up to $2.3 trillion in loans to support the economy. These actions are in addition to the massive "quantitative easing" purchases of Treasury and Mortgage-backed securities that the Fed has carried out to ease liquidity problems in the financial markets over the last six months.

According to Fed Chairman Jay Powell in comments last Thursday, "Our country's highest priority must be to address this public health crisis, providing care for the ill and limiting the further spread of the virus. The Fed's role is to provide as much relief and stability as we can during this period of constrained economic activity, and our actions today will help ensure that the eventual recovery is as vigorous as possible."

If we add up all the U.S. fiscal and monetary stimulus actions over just the last couple of months (actual and proposed), the number is approximately $5 trillion! Despite these actions, several major Wall Street investment firms are now forecasting declines in U.S. GDP of between 15% and 30% in the second quarter and an unemployment rate that could skyrocket to as high as 20%.

After plunging 35.4% in only 23 trading days between February 19th and March 23rd, the benchmark S&P 500 Index has rebounded 27.3% in just 13 trading days to last Thursday's recovery high. This recovery represents approximately 50% of the total decline from the February 19th all-time record high to March 23rd's reaction low.

In my last column dated March 18, I voiced a rare bullish call based upon sentiment numbers that reflected levels of extreme bearishness that often mark a bottom and also historically high insider buying numbers. Of course, massive Fed intervention to drive interest rates to near zero and to add liquidity to the financial markets allowed for justification to re-enter the stock markets on the long side.

So what now?

Even though investors are often safe by following the old axiom "Don't fight the Fed", I don't believe the current rally in stock prices (even with the Fed's support) can last without at least a test of the intra-day lows posted on March 23rd. In percentage terms, a fresh decline from last Thursday's closing price of 2,790 in the S&P 500 to near the late March low at 2,192 would represent a loss of approximately -20%! And given the uncertainties relating to the potential consequences from the current global pandemic (like massively NEGATIVE Q-2 corporate earnings and NO MEANINGFUL SHARE BUYBACK ACTIVITY), we just can't rule out an even steeper decline in what may be a persistent bear trend that penetrates the March lows before markets stabilize with several months of base building action ahead of the next potential meaningful rebound.