The Phaserl


A Murderous Complacency

Dark omens are circling everywhere in today’s markets

by Adam Taggart, Peak Prosperity:

Running requires me to read and process a lot of data on a daily basis. As it’s hard to digest it all in real-time, I keep a running list of charts, tables and articles that catch my attention, to return to when I have the time to give them my full focus.

Lately, that list has been getting quite long. And it’s largely full of indicators that concern me; signals that the long era of “extend and pretend” in today’s markets may finally be at its terminus.

Like crows circling overhead, every day brings with it new worrisome statistics that portend an ill change ahead. Indeed, these omens are increasing so quickly now that it’s hard not to feel like Tippi Hedren in Hitchcock’s suspense classic The Birds:

So what are the data that make me think these crows will soon be feasting on the carcass of the great bull market that has powered stock, bonds, real estate and most other asset classes to record highs since 2009?

Rogue’s Gallery

Complacent Investors

Investors have enjoyed remarkably gentle treatment by the stock markets over the past half-decade. Retracements have occurred much less frequently than historical norms, and have been shallow and short-lived when they happened.

Tom Lee, head of research at Fundstrat and often referred to as “Wall Street’s biggest bull” notes that 2016 was the mildest year on record for the S&P 500, with only 7 days in which the index traded at less than 3% of its 52-week high. Similarly, the 2013-2016 period has seen the lowest volatility of any 4-year stretch in history:

Number of days S&P 500 off its 52-week highs chart

Lee notes that despite the record calm, annual returns are moderating. As conditions begin to mean-revert, he worries that lower prices are ahead and is predicting a 5-7% market correction in the first half of 2017.

JP Morgan’s lead quant Marko Kalanovic also issues a striking similar warning: “Following the recent rally, a level of risk complacency has started to set inThe ratio of S&P 500 Puts to Calls has dropped to a ~3 year low, and the VIX reached near-record lows of ~10. ” He, too, is calling for a ~5% pullback in the first half of this year.

Bizarre Price Action

Assets like stocks are (or, at least, are supposed to be) valued based on expectations of income. If income is increasing, then so should prices. But that’s not what we’re seeing.

The famed Dow Jones Industrial Average hit 20,000 for the first time ever on January 25th. Things must be going great, right?

Well, not that great. Wolf Richter shows that the total aggregate revenues for the 30 companies that make up this index was actually lower in 2016 than in every year from 2011 onwards:

Total DJIA revenues chart

Hmmm. Well, revenue isn’t everything. At the end of the day, it’s earnings that matter. Perhaps corporate America is becoming more efficient and posting record profits.


S&P 500 vs T12M EPS chart


We’re seeing a clear trend of rising prices in the face of lagging performance. One of those will need to correct. Which seems more likely?

Dismal Outlook For Future Returns

John Hussman was been warning us for years that QE/etc has pulled all the value of future returns into present asset prices. Today’s investor has to make a choice: either buy now and expect no/low returns for the next 10 years; or wait for a price correction in the markets and then buy at low valuations to get appreciation from there.

Lance Roberts visualizes this pickle in the chart below, which shows that, historically, markets as richly-priced as today’s have offered sub-par annual returns for the following decade:

PE vs 10-year returns chart


As you can also see from the above chart, the S&P spends at lot less time at price-to-earnings (P/E) ratios above 20 as it does below. At today’s average P/E of 28+, prices have a long way to fall when a return to historic averages occurs.

Complacent Consumers

Like investors, consumers’ worries about the future have dissipated as borrowing rates have lowered, and home and 401k prices have risen. Consumer confidence hit a 16-year high in December, surpassing levels preceding the 2008 financial crisis:

Consumer Confidence Index chart


Note how confidence levels at this current height are nearly always followed soon after by recession.

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