Narrowing down what pricks the bubble…from 16 possibilities
Two popular questions I hear these days are: What is the possibility of picking a perfect bracket for the NCAA Men’s Basketball tournament, which involves choosing the winners of 63 games over 3 long weekends? Answer: according to Duke professor Jonathan Mattingly, the odds are 1 in 9,223,372,036,854,775,808. That is over 9…wait for it… quintillion ). What will finally push the stock market from 10 years of exuberance to a condition known as a burst bubble…a la the years 2000-2003? That is a far less precise calculation, and it has nothing to do with numbers higher than most of us can count…unless we are talking about the national debt, of course.
With the middle weekend of the NCAA tourney upon us, I thought I’d offer my own suggestions of 16 items that could ultimately be, as a college basketball announcer would say about a shot to seal a win, “the dagger,” for the longest bull market in modern equity market history. As with March Madness, I have divided them into 4 brackets, not by region of the country, but by type of market risk. Here they are. THE NOT-SO-SWEET 16 The “Quantitative” Bracket The “CAPE” – this popular version of the price-earnings ratio, which smooths out corporate earnings over time and incorporates inflation, is about as high as it has ever been…except for the Dot Com Bubble…and in the late 1920s. In fact, CAPE closed January right about where it was in October of 1929, the month of “Black Monday” on Wall Street. The S&P 500’s 10-year annualized return is over 15%. That’s in the top 4% of all data going back to 1960. The only time the S&P was roaring louder than it is now was…you guessed it…the period leading up to the Dot-Com Bubble. The Unemployment Rate
is threatening to bottom and start climbing. I am not talking about the “headline” rate that is typically what you see in the headlines. I refer to the “U-6” unemployment rate, which includes those who gave up after looking for a job, or who are working multiple jobs to make ends meet because one job doesn’t do it. It is threatening to pop above 8%. Skyrocketing Consumer Credit – with 16 items to choose from, why did I select this one? Because I almost can’t believe my eyes. This is the growth in consumer credit, not the total level of it. Until 1980, consumer indebtedness was nearly flat from year to year. Then, the “debt bubble” started, burst in 2008 and has now come back stronger than ever. This should concern any investor that thinks the U.S. economy is business-as-usual today. BBB Bond Spreads to U.S. Treasuries – the so-called option-adjusted spread is around 1.6%. Translation: rarely have BBB bonds, one step away from “junk” status, been priced with such complacency. Furthermore, about half of the “investment grade” bond market (ratings AAA down to BBB) is now rated BBB. That smells like corporations collectively are just hanging on to that investment grade status. This is about as healthy as when your star player drops to the floor with leg cramps in the waning minutes of a close game. Mortgage Debt approaching 2008 peak – gee, I was so focused on similarities to the Dot-Com Bubble that I took my eye off all the similarities to the Financial Crisis. OK, I didn’t, but I think you get the point. $22 Trillion…that’s with a “T” – and that’s where the U.S. Government debt burden is going
Related: Why The Next Recession Will Be Different The “Sentiment” Bracket Consumer Sentiment resilient, but peaking? Consumers may be loaded up with debt, but at least they are happy about it. The University of Michigan indicator has rebounded (yes, basketball pun) to a level seen in…you guessed it…2000 and 2007. Companies with no sign of profits launch IPOs – CNBC reported recently that over 80% of companies that went public in the first nine months of 2018 were unprofitable businesses in the 12 months prior to going public. This is a higher percentage than during the peak of the Dotcom Bubble in 2000. Of the 11 S&P sectors, 7 are up more than 10%…this quarter! – I know, I know, the end of 2018 was horrible. But even as stock market bounces go, this one feels too far, too fast. So, enjoy the ride and don’t get overconfident. But I know many investors will. Everyone’s a stock market expert – I will return to this topic in the near future. For now, suffice it to say that investing has been reduced to a “buy the index and count the days until you are rich” environment. That hasn’t been a dominant emotion since….yeah, the 2000-ish period. The “Geopolitical” Bracket
By this point, I suspect your own sentiment about this list is “Rob, make it stop.” Well, you can’t have a Not-So-Sweet 16 with only 12 issues. But I do sympathize, so for this last bracket, I will simply list the countries and regions that make the list of market threats. There are plenty, but you can consider this my “final four” in that regard. North Korea China Iran The U.K. (Brexit)
And with that, I will Brexit…I mean, exit, this “tournament” of threats to your wealth. Do not get discouraged. There are always bull markets amid the volatility, even if they are not in areas that roll off the tip of the tongues of investment pundits. The key is to recognize that we are in most interesting times, and to set yourself up so that your portfolio can respond to a very wide variety of future outcomes.Follow Rob Isbitts on Twitter @RobIsbitts
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