Too many are ignoring all the warning signs coming from the markets

A medical doctor can list the warning signs of pending serious health problems.

Similarly, an economist can cite the warning signs of looming economic troubles. However, no one can predict the timing of those events, though they are certain to occur.

There are two things to consider here. First, the condition of the stock market itself. Then, the economic background is key to the economic future.

What is surprising is the widespread optimism about the stock market; this despite the fact that stocks have provided a negative return for a decade, and investors have suffered a great deal in recent years. We have learned that being a contrarian usually is rewarding. Nowadays market “experts” keep repeating the stock market has seen its lows for some time to come.

A market commentary from Bloomberg repeats this sentiment with a headline, It’s Time To Buy Equities. A highly regarded mutual fund manager stated he is getting back into banking stocks, and a hedge fund manager who sold half his equity portfolio changed his mind, saying, “I’m more optimistic. I’ve put risk back on.”

Then too, a famous buy-and-hold advocate has been quoted as saying that nearly everyone should invest in the stock market and keep their money there as long as they can. A headline in USA Today announced that Optimism kicks off earnings season.

A Stanford University professor, an author of research papers on the market, mocked the comment of the Federal Reserve Chairman, who declared the outlook is uncertain. The professor said that he knows what to do when others are uncertain – buy stocks.

None of the above comments are typical of market bottoms, but rather epitomize complacency. Investors also are contented, so they have not reduced their holdings of mutual funds.

Investors should be very wary of this widespread lack of scepticism.

In addition, the economic background is more ominous than it has been since the 1930s. The ratio of household debt to income remains alarmingly high, at an incredible 126 per cent, while the pre-2000 average was 70 per cent, even though nearly $600-billion of household debt has been destroyed. The Federal Reserve’s balance sheet is triple its normal size, having provided funds for companies in need. There simply is too much debt outstanding, while governments suggest individuals take on more debt and continue to purchase houses beyond their means.

The euphoria today is similar to 1930, when the stock market recovered half of the 1929 crash. Clearly, all the warning lights are flashing, “Trouble ahead.”


Bruce Whitestone