by Michael Pento, Market Oracle:
On March 9, 2009, The Wall Street Journal’s Money and Investing section posed this ominous question: “How low can stocks go?” The stench of economic malaise was suffocating as the Dow Jones Industrial Average (DJIA) rounded off its fourth straight week of losses, and the S&P 500 touched below 700 for the first time in 13 years. Goldman Sachs cautioned the S&P could fall to 400, while CNBC’s Jim Cramer was busily calculating the stock valuations of the DJIA components based on balance sheet cash levels.
Yet miraculously, as the market pundits stood despondently believing there was nothing positive on the economic horizon and that no stock was worth buying at any price, investors stared into the abyss and took a leap of faith. And just like that, the market had bottomed. Dow 6,440.08 was a buying opportunity, and with the Fed’s QE spigot operating on full throttle, the Dow was poised for a historic take-off.
Oh, what a difference nine years make! Today, the Dow has now crossed the then unimaginable level of 26,000. The rationalizations abound; lower corporate taxes, less regulation and sizzling business and consumer confidence all scream “happy days are here again!” With nothing but blue skies ahead, the only question left for Wall Street to ponder is the uncertainty of how many days it will take before the Dow crosses another 1,000-point milestone.
But not so fast…Remember, the stock market climbs a wall of worry, and in 2009 that wall was seemingly insurmountable. Back then the sentiment was that nothing could go right–yet the market endured as economic and financial Armageddon loomed around every corner. Today, the exact opposite scenario is evident. The belief prevails that nothing can go wrong. However, hiding in plain sight there is one gigantic cliff the market has already started to head down. But the real reason behind the next violent crash in the equity market is the current bursting of the worldwide bond bubble.
The stock market now resembles an unstable uranium 235 isotope. The splitting catalyst will be the result of slamming $10 trillion worth of negative-yielding sovereign debt and $230 trillion worth of total global debt into the reversal of central bank money printing and unprecedented interest rate suppression.
Remember this truth: If the market can rise on sluggish growth, it can also fall when growth seems fine.
Investors must determine what has already been priced into shares and what lies ahead for growth. It is essential to keep in mind that the market is over-priced according to almost every metric. For instance, even if all the rosy economic projections pan out for the tax cuts, the market is still trading at 18.6 times forward 2018 earnings, according to FACT SET–the market trades typically closer to 15 times earnings. The trailing PE ratio is now at its highest going back to 2009.
In addition to this, we have cash levels at all-time lows and margin debt at all-time highs. Mutual funds and ETFs that focus on stocks just recently raked in $58 billion in new money, according to Bank of America Merrill Lynch. And at 150%, the total market capitalization of equities has never been higher in relation to the underlying economy.
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