He is correct. On a short-term trading basis, as opposed to the longer-term outlook in the main body of this missive above, we are moving into the “seasonally strong” period of the year for stocks. However, there are many risks, even in the short-term, to consider as Eric notes.
- Other notable risks include the ongoing depreciation of the Chinese yuan currency, the ongoing instability in the European banking system, and the increasing realization that risks associated with ‘Brexit’ did not end but only just started with the conclusion of the vote back in late June.
- The S&P 500 Index is now trading at more than 26.2 times trailing as reporting earnings. This is a valuation that is venturing well into tech bubble territory at this point and comes at a time when corporate profit margins are in decline. And while extreme valuations during the tech bubble were heavy concentrated in selected sectors such as technology, media and telecom, today’s frothy valuations are more evenly spread across the entire sector spectrum. Put more simply, unlike the tech bubble, no stock investors should consider themselves safe from the effects of the next bear market once it finally arrives.
- One other persistent risk is the ever-present potential policy mistake or unexpected shift. This would include most notably a major global central bank suddenly shifting toward a more tightening policy stance. This risk is most pronounced out of China, which has recently been draining liquidity out of its financial system. While everyone refers to the so-called ‘taper tantrum’ of May-June 2013 as being the reason for the sudden and sharp stock and bond market sell off at the time, the far greater reason was the fact that the Chinese interbank lending market had effectively seized up at the exact same time.
- Lastly, is the constitutional referendum vote in Italy set for Sunday, December 4. Why exactly would global investors care about the outcome of a constitutional referendum in Italy in the coming weeks? Because the outcome has the very real potential to turn what was an isolated incident in the United Kingdom leaving the European Union suddenly into a trend.