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Persistent Euphoric Delusion: The Final Stage of All Bull Markets

Real Investment Advice  ( Original )
APR 3, 2018

Valuations are sky high. Stocks rocket north on the “solving” of fake problems Trump creates one moment (Amazon stock plunges after Trump's tweets) that are then gone the next when it turns out he is just lying as usual (Stocks Soar After Bloomberg Report Unleashes Amazon Buying Panic).

Shouting “I’m going to set this house on fire!” and then not setting that house on fire is not a net positive event, but it’s treated as one by this stock market at this time…a market so drunk on its own exhausted-toddler exuberance that it’s difficult to quantify just how ugly the meltdown is going to be.

The reason that bull markets die of euphoria is that market prices, particularly in the “momentum” stage of the investing cycle, are based on the assumption the current cycle will continue into perpetuity. Earnings, the economy, sales, etc. will continue to expand in a linear fashion…forever.

Since the economy, as well as virtually everything in life, is cyclical, it is only logical that eventually the disappointment of those assumptions sparks the beginning of the next bear market cycle.

Currently, the list of things that could disappoint the markets continues to grow:

  • The ongoing rhetoric from Washington over “trade wars” combined with complete fiscal irresponsibility. 
  • The reduction in support from Central Banks in terms of liquidity support.
  • The continued insistence of the Fed to hike rates which continues to reduce the “low rate supports higher valuations” argument.
  • The risk of further contagion from Facebook and other “big data” companies on the technology sector (which comprises roughly 25% of the S&P 500) as global threats of “internet taxes” or other data collection policies are considered.
  • Revenue growth continues to remain weak which is leading to downward revisions in earnings estimates.
  • Both domestic and international economic growth have peaked.
  • Inflationary pressures from wage growth remain non-existent while the cost of living continues to rise (this will be exacerbated by Trump’s “trade wars.”)
  • The yield curve continues to deteriorate and LIBOR has blown out which have typically been early warning signs of bad outcomes. 

Not surprisingly, 1901, 1929, 1965, 1999, and 2007 were periods of extreme “euphoria” where “this time is different” was a commonly uttered phrase.

What about today? Is this another period of “euphoria” or are investors still maintaining enough “skepticism” to fuel the bull market further? Unfortunately, there is little evidence investors are “skeptical” of much of anything right now.

ORIGINAL SOURCE: Technically Speaking: The Death Of Bull Markets by Lance Roberts at Real Investment Advice on 4/3/18