Equity Market Forecast: Correction, Crash or new Highs?

Everyone tuned-in to stock market news knows the story. US equities experienced a 10-percent correction recently over concerns that higher inflation would push the Federal Reserve to tighten monetary policy faster than expected.

The Street feared that stopping the cheap money flow that juiced equity markets since 2009, would put a damper on future stock market investment.

Absent from most of the business news coverage is how overvalued the markets are. With the price-to-earnings-multiple at 26 times earnings for the S&P 500, compared to a long-term average of about 14 times earnings, the markets are at the high end of their ranges by historical standards.

Also under reported is the highly overleveraged Exchange-Traded-Funds and money flowing out of managed funds and into index funds. Thus, the gambling fever that has driven the Dow up 45 percent since the Trump election is unsustainable.

However, what can be sustained is a rising market fueled by President Trump’s bountiful tax breaks to corporations, whose earnings, already robust, will keep them gambling in the markets.

With sales growth at the highest in six years, and earnings for the S&P 500 Index up 15 percent in the fourth quarter and expected to hit 19 percent this year, the fundamentals for corporations to buyback stocks, which in effect drives up earnings-per-share, are strong.

Further, Trump’s generous tax plan, which also allows corporations to repatriate cash stored in overseas banks, will further empower companies to buy-back their own stocks, thus stabilizing, and over the near term, even pushing markets higher.

Indeed, with some $1.5 trillion in cash offshore, company stock buybacks already hit a year-to-date record, surging $170.8 billion, topping the $147.2 billion in the period of 2016… the most ever for this early in the year according to Birinyi Associates.

TREND FORECAST: Considering the overvalued and overleveraged market and the turbulence hitting Wall Street and rattling equity markets worldwide, we forecast the beginning of the end of the Trump Rally. As detailed, with massive corporate market involvement, stock prices will go higher, but the long-term trend lines are heading lower. 

In addition, we are concerned that a black swan/wild card event will crash already unstable markets. Most notable are the United States and Israel ramping up the war in Syria, their increased threats against Iran and Hezbollah in Lebanon, and Israel’s escalating bombing runs on Gaza. Beyond war expanding throughout the Middle East, it could dramatically drive up oil prices which, in turn, would compound already existing inflation fears.

To see where the markets are going, watch gold prices! The ultimate safe-haven asset in times of economic and geopolitical turmoil, prices should have spiked in response to the recent massive Wall Street sell-off. Instead, prices declined and continue to move lower because rising interest rates make non-yielding gold less attractive.

Should prices suddenly spike and stabilize above the $1,450 range, it will signal serious stock market panic that will override  inflation and rising interest rate concerns, driving gold prices higher by several hundred dollars.