I gave four reasons, promising three more. The first four are that the selection of a new Federal Reserve chairman is a bigger deal than is expected; politics will move to the forefront in the coming months; the expected 2013 tapering is likely a policy mistake; and, simply, economic fragility.
I’m writing this as the S&P 500 Index has risen for six straight days through Tuesday, rebounding from a decline in August. And remember that, in January, I made a prediction at the Weiss Wealth Summit in Palm Beach, Fla., saying stocks would rise in the months ahead. That forecast turned out to be correct, as the S&P 500 posted a 20 percent-plus gain.
Here are reasons five through seven:
|The developed world desperately needs emerging markets to grow.|
5. The economic prospects for emerging markets are uncertain. Fast economic growth in emerging economies has been taken for granted — until now. So far this year, the results are not encouraging, and that’s bad news because the developed world desperately needs countries such as India and Mexico to grow.
What’s worse is that, looking ahead, analysts have ratcheted down their forecasts. Asia, excluding Japan, continues to jog along at a respectable, but slower, 6 percent-plus rate of GDP expansion. Latin America is moving along at a 3.5 percent to 4 percent clip.
And there’s a growing realization that China’s economy, the second largest in the world, can’t sustain the pace of the past. Chinese banks are trying to unwind the credit boom that was created as a result of the country’s own policy response to the global financial crisis.
6. This cyclical bull market is long in duration. We are now almost 54 months from the stock-market low set in March 2009. Over the past six decades, the average bull market has lasted 43 months, with the longest capped at 60 months. And those took place during times of prosperity and innovation; today’s structural obstacles didn’t exist.
Moreover, the intermediate leg of the cyclical bull market, which began in November 2012, has already recorded a 30 percent advance in only eight months.
7. Valuations are stretched. Since I expect only 2 percent growth in S&P 500 earnings for 2013 and 2014, any additional stock-price gains are almost exclusively dependent on improving valuations. But that’s unlikely, given today’s deep structural global economic problems, the disequilibrium in the U.S. job market and deleveraging.
Consider what’s called the Shiller P/E ratio. In his 2000 book Irrational Exuberance, Yale University economics professor Robert Shiller claimed to have developed a better version of the standard price-to-earnings ratio. His timing couldn’t have been better. The Shiller P/E ratio was at an all-time high in 1999-2000, a clear signal of overvaluation and a reason to sell. Today, the professor’s valuation work says stocks are, again, overvalued. At the end of July, Shiller’s ratio was 23.8, the highest since 2008.
I don’t expect a major stock-market correction, which I would define as a drop of 25 percent or more. But I do anticipate that at some point between now and Thanksgiving, equities will have fallen 10 percent to 15 percent.
That’s why I would recommend you keep cash handy. You’ll be able to do some bargain shopping in the global equity markets later this year.
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