Many investing gurus are predicting a bear market in U.S. stocks. And many more are predicting new highs. How can you tell who is right?
Let us examine with the help of a chart. Please click here for an annotated chart of the effective federal funds rate (which is set by the Federal Reserve) and S&P 500 Index SPX, -1.92% Please note the following:
• The chart shows that the effective fed funds rate has risen rapidly.
• The fed funds rate is still lower than where it should be, given the strength in the U.S. economy.
• The Federal Reserve has indicated that it is on course to raise the rate in December.
• The Fed appears to be on course to raise the rate two to three times in 2019.
• The chart shows that a vast majority of the rise in the stock market over the past several years was primarily due to P/E (price/earnings) expansion stemming from low interest rates.
• Now the earnings have risen, and P/Es have fallen.
• According to our work at The Arora Report, earnings growth momentum has peaked.
• We have been sharing with you long before this stock market decline that, according to our work, economic growth in the world outside the United States, especially in China, was slowing.
• Lower economic growth often means lower earnings.
• Higher interest rates often mean lower P/Es.
• The character of the stock market is changing. What has worked over the last nine years is not likely to work over the coming years. Please see “The poster child of bull-market excess just dimmed the prospects of the broader stock market.”
• Pay attention to the technicals. Please see “These two chart patterns tell the real story of the stock market.”
It comes down to two things
What happens next in the stock market comes down to two things.
1. Does the Fed relent or stay on its present course? If the Fed stays on its present course, expect P/Es to shrink.
2. Will economic growth slow? In part, it depends on the resolution of the trade war….Read more at MarketWatch.
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