The post-election rally puts us into euphoria territory now, but why would we classify this as euphoria, anyway?
First, it is based solely upon expectations for some economic changes as yet undescribed and unvetted which are hoped for from the next administration. No plans, no budget, no schedule - just "hope". Not in an early phase of a market recovery, but AFTER new all-time highs were set a bit earlier in the year. Secondly, the PE of the market (as represented by the S&P500) is higher now than it ever was, except for just prior to the crashes of '29 and '08. Third, overall market capitalization versus GDP is now at all time historic highs. This is the so-called "Buffet" indicator. With the "value" of stocks at 160% of GDP, this is definitely "bubble" territory. Finally, corporate debt is also at an all-time high, as corporations have been borrowing heavily while interest rates have been at historic lows. Total corporate debt is now nearly double what it was just prior to the recession of '01-'02 and the Great Recession.
The euphoria phase can last another week, month, quarter or year, but being in this phase very typically means that a precipitous fall can be triggered much more easily that in earlier phases. Some well-followed pundit(s) might "predict" a crash, some foreign financial or socio-political event might cause much more concern than in the previous several years, or "smart money" will simply figure out that this particular party is over, and begins a significant pullout, while the "front men" brokers keep pumping the market with optimistic rhetoric and "buying opportunities". Whatever the trigger is, the initial stages will be faltering and halting as the upper limits of prices are reached. Our AP-SI indicator triggers as the market falls (over a few months), and warns as the markets enter euphorically high territory. Let's see what this first week of 2017 brings...
- AP -