No. I have seen all kinds of ‘explanations’ but none of them work for me. As Dorothy said in the Wizard of Oz, this isn’t Kansas anymore. We have come to a very strange place indeed.
The anticipated (but not announced and unlikely to pass) Trump administration’s tax and infrastructure programs have added $2.5 trillion to the market capitalization of U.S. equities since the election.
This month, panic buying has taken the Dow to 11 straight closing all-time highs, the longest streak in 30 years. Last Friday marked the third up-week in a row for the Dow and the fifth up-week in a row for the S&P and Nasdaq despite weakening hard data on the economy.
The 14-day Relative Strength Index for the NDX (the Nasdaq’s 100 largest stocks) closed at 84.7 on Friday, the highest close since January 1992. It was 84.2 in January 2000 at the end of the largest tech bubble ever.
The NDX is up 11 out of the last 12 trading days. That single down day totalled a measly 1.7 pts. The technology sector within the S&P 500 is up 14 days in a row.
As Herb Stein famously said, “If something cannot go on forever, it will stop.” We just don’t know when. The economy, the expectations of Trump policy, Fed monetary policy…none of these things can possibly support current valuations which place this epic market bubble at the top of the list including the 1929, 2000 and 2007. Valuations don’t matter until they do. They certainly haven’t mattered for a while. But we can’t deny where stocks are trading now compared to all-time historical peaks. This is the craziest market I have ever seen.
T.S. Eliot wrote that April is the cruellest month. I see that possibility coming up. President Trump owes us a State of the Union address. He will finally have to give us some details on his economic policies. Will his tax plan meet market expectations? If it does meet those expectations, can it possibly pass a Republican Congress whose leadership has said it will not support anything that is not deficit-neutral?
In March, we once again hit the deficit ceiling. Will a Republican Congress give Trump the authority to blow out the deficit just as Obama did?
Where is the Trump administration on its policy of repealing and replacing Obamacare which was supposed to have happened by now?
And in March we get the next Fed meeting. According to the recently released minutes of the last meeting, a majority of members of the FOMC thought that rate hikes should come sooner than later if the economy remains on its current track. Really? With all the questions about what Trump will actually do, a rate hike seems unlikely. What excuse will they use this time? Will they be forced to admit that the economy is not as strong as they expected? How will the market react to that news given that it seems to be anticipating a growth surge?
My guess is that, in March, Dorothy is returning to Kansas. That is, markets are headed back to reality. Herb Stein will be right: what cannot continue doesn’t continue. Because as they used to say in the old days, trees do not grow to the sky.