These Markets Have Hit a New All-Time High

What else do you need to know?

The US market has hit a new all-time high. And not just one index either. It’s the whole lot of them. As Bloomberg reports:

All four major U.S. equity benchmarks climbed to record highs as oil jumped on optimism OPEC will agree to cut output. The yen rose as markets digested reports of a tsunami warning in the Fukushima region.

The S&P 500 Index, the Dow Jones Industrial Average, the Nasdaq Composite Index and the Russell 2000 Index rallied together to their all-time peaks for the first time since 1999.

There you have it. And yesterday the Aussie market put on a spurt too, up more than 1.3%.

Good times, right?

For a long time, we’ve told you that there are reasons to be fearful about the market at this high level, especially when the fundamentals remain weak.

So, with stock prices and bond yields rising in optimism, does it make sense to continue issuing our dire warnings?

We’ll take a stab at answering that below…

Not bearish enough

Despite the bullishness on Wall Street, are we still worried about a potentially major and disastrous stock market crash?

Channelling our inner Sarah Palin, ‘You betcha!’

During the last quarter, US companies as a whole reported the first quarterly rise (barely) in earnings since 2014.

But as the familiar chart below shows you, analysts’ earnings forecasts are still a long way ahead of actual earnings:

Source: Bloomberg
Click to enlarge

As a refresher, the white line to the left of the green line records actual earnings results for the US S&P 500 index. The white line to the right of the green line shows forecast earnings.

In order for the S&P 500 to hit these forecasts, earnings have to rise 18.7%. That’s a tough ask when you consider earnings are down 2.3% over the past year, and were up just 0.57% over the last quarter.

So, we’re not buying the euphoria.

We’re also sceptical when we look at the earnings forecasts for the component companies of the Dow Jones Transportation Average. Check out the earnings chart below. It’s in the same format as the chart above:

Source: Bloomberg
Click to enlarge

Far from being bullish about earnings, analysts covering Dow Transport stocks are decidedly bearish.

If we believe analysts are overly optimistic when it comes to S&P earnings, we should apply the same tone of caution here. In this instance, we would proffer that while bearish, analysts aren’t nearly bearish enough.

It’s no doubt why the Transportation Average has lagged the Dow Jones Industrial Average in recent years.

Why do we pay attention to transportation stocks? Simply because shipping, airline, and road transport companies can provide a clue to the real health of the economy.

Even in a digital economy, companies need to ship things to the end user. Even if people buy from rather than from Target or Woolworths, it still involves the shipment of goods.

If goods aren’t moving, then folks aren’t buying.

Furthermore, we wonder just how much households and businesses will be in a position to buy anything as interest rates seemingly continue to rise.

And, based on the futures market, interest rates are rising. The futures market has now priced in a 100% certainty of the US Federal Reserve raising interest rates at its 14 December meeting.

The market is now priced for perfection. Market players see no chance of the Fed not raising rates.

That’s because investors are now convinced the US economic recovery is real. But is it real? And how real can it be when interest rates have been kept at a record low for eight years?

To repeat an over-used analogy, the junkie may seem fine when plied with methadone, but withdraw it, and their real physical and mental health soon becomes apparent.

The US economy has been on metaphorical methadone for eight years. The doctors (not real doctors, just economic doctors) at the Fed are now beginning the withdrawal program.

It seems like that we shall find out how much of the recovery was genuine, and how much was induced by the ‘drugs’, in very short order.

Below par

The chart below shows US GDP (gross domestic product) going back to 1947:

Source: Bloomberg
Click to enlarge

The period between the red vertical bars is from late 2008 through to today. During that time, GDP averaged 1.7% annually.

Taking the previous 20 years at random, the average was 2.7%. In other words, despite US government debt rising by more than 50%, and despite the US Federal Reserve buying trillions of dollars in US government bonds, US economic growth has lagged the previous 20-year average.

What will it do when interest rates rise and the monetary stimulus is taken away?

We shall watch with a keen eye.


For the past year or more, colleague, Callum Newman has pleaded with me to promote his podcast, The Newman Show. You can download it free from iTunes, here, or Stitcher, here.

Callum does a great job with the podcast. He’s had some cracking guests, including Jim Rogers, Gerald Celente, and Porter Stansberry, among others.

Unfortunately, whether out of pure absentmindedness or spite, your editor always seemed to forget to give it a plug. So today, I’m doing it. Consider it done.

Oh, by the way, and completely coincidentally, your editor, along with our research colleague, James ‘Woody’ Woodburn, ‘hijacked’ The Newman Show podcast last week with our own episode.

We discussed a number of things, but mostly related to Donald Trump. If you tuned into that episode, you’ll be pleased to know that we’ll be back with another episode this weekend. Based on the feedback we’ve received this week, expect us to make a comment or two about climate change! (See today’s Mailbag.)

If you don’t yet get this podcast, sign up now, listen to our first episode (and all Callum’s previous episodes, of course) and then wait for the next one to download to your podcast player automatically on Saturday morning.

And in other good news (or bad, depending on your disposition), if these two pilot episodes go well, we’ll launch our own weekly podcast very soon.

So tune in, see what you think, and then feel free to send us your feedback to and type ‘Podcast feedback’ in the subject line.


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Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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