We Are Witnessing Strange Stock Market Behavior, Prepare for a Hangover
Sooner or later, investors are going to pull the plug on the current strange stock market behavior. Picking the right stocks and building a resilient portfolio is more art than science. That’s why seasoned stockholders are going to start wondering what is pushing stocks so high. Certainly, it’s not earnings, given that price-to-earnings (P/E) ratios are literally off the reservation, as they say. It’s irrational exuberance all over again.
Simply put, while overly risk-averse investors may not gain much, they also don’t lose much. Rather, the current attitude has taken the opposite course. Investors are taking on huge risks; indeed, these are the risks that inevitably end up colliding to produce a market correction. There is simply too much confidence.
Advertisement
Also Read: Warren Buffett Indicator Predicts Stock Market Crash in 2017
In the face of such a scenario, investors should at the very least ask questions. Instead, Wall Street continues to add records upon records. And this, despite the fact that all the big shots of finance, Warren Buffett included, have talked about the risk of a market bubble. But, we’re in the midst of a financial euphoria—or “irrational exuberance,” as Alan Greenspan put it.
Investors Have Become Numb to Risk
One way to tell that there is an excessive numbness to the kinds of things that can go very badly very quickly is to look at what happened on September 15. There was another North Korean missile launch. The missile, for the second time in a few weeks, flew over Japan. This demonstrates that North Korea has the capacity to deliver a warhead to target. Pyongyang has delayed a nuclear test—there was one already during the summer—but the message is clear. There are few doubts now that North Korea could soon have the ability to launch a nuclear strike.
You would think Wall Street noticed. Not a peep. A few hours after the missile test, there was news from London, that a terrorist set off an explosive in the London Underground. It wounded 22 people. But, again, it should have raised a minimum of concern. These are the kinds of events that have always caused a small correction at the very least.
It’s not the attack by itself that is a problem, it’s the context in which it happened. The U.S. has just announced an extended stay in Afghanistan. Syria has almost succeeded in putting “Humpty Dumpty back together again,” but wars in the Middle East are not going to end anytime soon. Turkey, Kurdistan, Iran, the Gulf, and of course Israel in the middle of all this, are going to keep the U.S. bogged down for more of the same.
This Is No Time to Play “Set it and Forget It”‘ with Your Portfolio
This means that risk levels remain as high as they have ever been. It’s no time to relax. Now, the risk to the markets doesn’t necessarily come from wars or from the Middle East, per se. In fact, defense stocks will be going strong. The problem is less perceptible but no less dangerous. It’s a problem of overconfidence. That’s what is producing the strange stock market behavior.
The markets are so strong that any event is metabolized in a matter of hours. Some of those events could have major effects on the markets. Nobody has noticed, for example, that Trump has totally changed foreign policy. As president, there is no way that he can continue to support his big tax cut plan.
And, if you just came down from Mars, the tax plan is the real reason for the strange behavior. U.S. debt recently crossed the $20.0-trillion point. Keeping it under control while maintaining the current level of military preparedness is incompatible with tax cuts.
In other words, there are currently no economic elements that can be taken as a pretext to support bullish sentiment in the markets. Buy on rumor and sell on news, as the old adage of the markets suggests. That does not seem to be applying to Donald Trump’s economic program.
The rumors were that Trump would cut taxes. He was going to cut taxes on the middle class so much as to constitute a revolution—of the good kind. Some observers pointed out that Trump promises much more than he can deliver. That’s the optimist and the salesman in him. But now, it should be clear the rumors were too good to be true. The news suggests Trump cannot do what he promised.
The Deep State has swallowed up the 45th president as it has all others—or most others—in the past hundred years or so. Wilson and FDR promised to keep the U.S. away from foreign wars. We all know what happened to that. So did Trump. He was the most believable anti-foreign intervention candidate ever.
Yet, the global situation now is such that Trump won’t be able to avoid getting his hands dirty with gunpowder. This means that promises of tax cuts on corporate profits and on the middle class will have to wait—at best. Infrastructure investments will be postponed—indefinitely. In fact, Trump never gave a detailed plan. The markets have no detailed plan either. They can decide to collapse any moment and they are resting on weak foundations.
