Stocks are soaring and the 10-year old bull market is the longest on record. In fact, the party on Wall Street ranks as one of the greatest bonanza’s in U.S. stock market history. While the Nasdaq and S&P 500 are at record highs and the U.S. economy continues to chug along but there are a number of factors that could derail the bull market in the fourth quarter and into the first half of 2019.
At the start of 2018 many economist were predicting that U.S. stocks would take a breather. While the markets took a big hit in late January, U.S. equities have rebounded and soared to record highs.
The S&P 500 is up 8.5% year-to-date and up more than 12.5% since the spring. Since the markets bottomed in March 2009, the SAP 500 has soared more than 335%. The tech heavy Nasdaq meanwhile, is up 17% since the start of the year and is up 19% since the spring. Since March 2009, the Nasdaq has advanced an eye watering 542%.
Can the good times continue for the U.S. and Canadian stock markets? The stock markets appear strong and the U.S. economy is healthy, but there are a number of factors that could force the bull market to stall. Some of the biggest concerns on Wall Street and Bay Street right now are rising interest rates, geopolitical tensions, and slower earnings growth.
For the most part, since the stock market bottomed in March 2009, stocks have risen less because of strong corporate earnings and more because of streamlining efforts and share buyback programs.
Admittedly, U.S. stocks have done well in 2018 because of strong corporate earnings, due in part to President Trump’s tax reform, but that earnings growth has begun to slow and could decline in the fourth quarter and into 2018.
Global Economy Fragile
Why are corporate profits declining? The global economy, which showed signs of growth in 2017, has been volatile in 2018. The European economy is fragile and the U.S. dollar is robust; not a good combination for American companies that rely on exports…which is the majority of American stocks.
Ongoing Risks of a Trade War
On top of that, a trade war between the U.S. and, frankly, the rest of the world could wreak havoc on the stock market. A failure to nail down an agreement on NAFTA could also negatively impact Canadian stocks.
Rising Interest Rates
Rising interest rates could also put the brakes on the U.S. economy. Since December 2015, the U.S. Federal Reserve has raised its overnight lending rate seven times, from 0.25% to 2.0%. The Fed has signalled it will continue to raise rates two more times before the end of 2018. Raising rates too quickly, has historically, tipped the U.S. economy into a recession.
That means the long-in-the-tooth bull market, which hasn’t taken a real breather since it started in 2009, could be in jeopardy. This is, of course bad news for stocks. Not just because stocks could retrace, but because stocks are so overvalued no one can really say where the support level will be.
According to the Case Shiller PE Ratio, one of the most popular measures of stock market valuations, U.S. stocks are overvalued by 108%. On top of that, stocks have only been this overvalued once before, during the 1999 dotcom era.
Whether it’s 1929, 1987, 1999, or 2008, it never ends well when stocks are this overvalued.
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