The Fed's financial engineering could keep fueling markets for years.BY JURRIEN TIMMER, DIRECTOR OF GLOBAL MACRO FOR FIDELITY MANAGEMENT & RESEARCH COMPANY (FMRCO), FIDELITY VIEWPOINTS – 07/21/2021https://www.fidelity.com/learning-center/trading-investing/i...?In conclusionIn my view, interest rates are repressed by the Fed, and this will likely continue for a long time. That means that the stock market is 25% higher than it would otherwise be, but this can remain the case for a long time. Having said that, at 1.3% the 10-year yield probably has more upside than downside, and, all else being equal, that should be a drag on valuation.In my view, only an earnings decline or regulatory action will slow this train. As long as rates are low and companies produce more free cash flow than they can put to use, they will buy back shares, inflating EPS and raising the payout ratio in the process.Finally, while there have been pockets of exuberance and speculation in the markets, as a veteran of 36 years of market cycles I just don't see the bell-ringing signs that the market as a whole has reached a sentiment extreme.A bubble? No, not in the classic sense. Distortions through policy and financial engineering? You bet. Can it last? You bet. For how long? Well, my secular bull market roadmap suggests another 5–7 years of outsized returns. So I'll go with that.
Tops are very hard to call.But, I note that we're at an all time market high while breadth is terrible.Nasdaq NH-NL has been negative lately and is around zero, give or take, depending on the smoothing you use.Historically the combination of market highs with negative breadth within a few days either way has not been a good omen.Depending on how you check these things, about 1/3 of such times turn out to be market tops.The other 2/3 tend to be intermediate tops on the way to The Top.I don't think the market is topping out right now, but then what I think has little importance. Well, my secular bull market roadmap suggests another 5–7 years of outsized returns. This sounds a little bit like it's the opinion of someone with something to sell.Outsized returns---meaning above average.Meaning, in effect, prices rising faster than earnings, and things getting yet more expensive.On some metrics the broad US market is more expensive today than it has ever been in history.On other metrics, it's merely very expensive compared to history.That doesn't mean we're at a top by any means, but expecting another 5-7 years of multiple expansion starting here sounds like a bit of a reach.Is the guy willing to put money on his prediction?Jim
Is the guy willing to put money on his prediction?In this respect I find the results of my polls on the Berkshire board interesting, thata) the vast majority expects the S&P to either continue it's climb or to go only sideways for another 2-5 yearsb) and that in line with that the majority there does not hold a high percentage of cash, although from previous polls it seems many "Berkshire club members" have more than enough money and therefore have the option what to do with their "spare money", to invest it or to hold cash. So it "seems" (might be a too quick conclusion) they are putting their money on their expectation.
So it "seems" (might be a too quick conclusion) they are putting their money on their expectation.Maybe so. Something is changing.What I see are WWL investment style shifting of Growth --> Value to a WWL recent rapid shifting again from Value --> Growth and Mega-Cap Tech. Small-Mid cap is tanking.I agree on being very skeptical about the 5-7 year future, sounded like a presidential cylcle. The best outcome to expect IMO would be trending Sideways.GD_
I am imagining this might be the case. The pandemic has kept a lid on spending and much of these "savings" have flowed into the market as hot money. Compounded with the anticipation of a spurt of spending once the isolation is over; hence the market resilience. It could mean the market top would be reached as we get a clearer view of the end of the tunnel. The delta/lambda variants has served to delay the market top even longer by obscuring the pandemic's span.
Tops are very hard to call.But...Historically the combination of market highs with negative breadth within a few days either way has not been a good omen.Depending on how you check these things, about 1/3 of such times turn out to be market tops.The other 2/3 tend to be intermediate tops on the way to The Top.Nasdaq smoothed breadth is definitely looking negative while we're at or within a few days of all time highs.(for any smoothing out to one month EMA)So, definitely a bad omen which sometimes heralds a cyclical top.But that isn't [yet?] true for the broader NYSE, which might matter more.The Nasdaq isn't going to roll over into a market cycle bear without the broad market doing so as well.On the NYSE, market highs and breadth is falling, but still positive.On current trends smoothed breadth won't count as negative for another month. Or sooner or never.Jim
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