by Justin Spittler, Casey Research:
Larry Fink is terrified.
Fink runs BlackRock, the world’s largest asset manager. The company manages a whopping $5.1 trillion. That’s more than Goldman Sachs, Bank of America, or Wells Fargo. It’s more than the annual economic output of Japan, the world’s third-largest economy.
This makes Fink one of the most powerful people on the planet.
Obviously, you don’t climb to the top in Wall Street by being easily rattled. But right now, Fink’s nervous.
He’s worried about “a lot of dark shadows that could impact the direction of the marketplace.”
• Fink’s especially worried about consumer confidence…
Consumer confidence measures how everyday people feel about the economy and their own financial situation.
It’s subjective. You can’t measure it.
That’s why some investors don’t take it seriously. But they should.
After all, sentiment is what really drives stocks. It’s far more important than earnings, valuations, or the health of the economy. It’s why stocks can rally despite serious fundamental problems.
According to a recent survey by the University of Michigan, consumer confidence has been climbing since 2011. It recently hit the highest level since 2004.
• Americans have good reason to be confident…
After all, we just elected our first “investor” president.
Unlike Obama, Donald Trump wants to put American businesses first. He also wants to cut taxes, ease regulations, and rebuild American infrastructure.
These policies should help U.S. companies and workers.
That’s why Americans are so confident. It’s why the S&P 500 has rallied 9% since Election Day. It’s why the Dow Jones Industrial Average just topped 20,000 for the first time ever.
You can clearly see Trump’s impact on stocks in the chart below. You’ll also notice that consumer confidence hasn’t been this high since just before the 2008–2009 financial crisis.
• Thanks to Trump, greed is in the air again…
But this isn’t a good thing.
It’s a warning sign.
Today, consumer confidence is even higher than it was in 2007. And we all know how that ended.
The S&P 500 plunged 57% over the next two years. The Russell 2000, which tracks 2,000 small U.S. stocks, dropped 60%.
• Fink doesn’t think you should be buying stocks right now…
He explained why in a Yahoo! Finance investor event last week:
When consumer confidence was at the lowest, that was the low point of the equity market. You should be buying then. And now consumer confidence is high and the S&P 500 is very high. Maybe you should be selling now.
Fink’s not the only Wall Street legend who thinks this, either. Sir John Templeton, one of the greatest stock pickers ever, famously said:
Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.
This is why Fink thinks the chart above is “horrifying.” But that’s not the only thing keeping him up at night.
• Fink says “we’re living in a bipolar world”…
In my conversations with CEOs in Europe and CEOs in the United States they may be very bullish about what may come but most business people are not investing today.
Some folks might find this confusing. After all, the stock market is supposed to reflect the health of the economy.
But Dispatch readers know this hasn’t been the case lately.
Since 2009, the U.S. economy has grown just 2% per year. That makes the current recovery one of the slowest on record.
Meanwhile, stocks have been rallying for nearly eight years. That makes the current bull market one of the longest in U.S. history.
• U.S. stocks are now incredibly expensive…
Companies in the S&P 500 are trading at a cyclically adjusted price-to-earnings ratio (CAPE) of 28.9. That’s the highest level since the dot-com bubble. It means U.S. stocks are 73% more expensive than normal.
And that’s just one measure. Last week, we showed you two other key metrics that prove how absurdly expensive U.S. stocks are today.
In short, there’s not much upside in U.S. stocks, even if Trump can breathe life into the economy.
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