Summer may be coming to an end, but the heat in the stock market has not cooled down, as the stock market registered its hottest August performance in 14 years (S&P 500 index up +3.8%). With these stellar results, one would expect the corks to be popping, cash flowing into stocks, and the champagne flowing. However, for numerous reasons, we have not seen this phenomenon occur yet. Until the real party begins, I suppose the champagne will stay on ice.
At the end of last year, I wrote further about the inevitable cash tsunami topic in an article entitled, "Here Comes the Dumb Money." At that point in time, stocks had remarkably logged an approximate +30% return, and all indications were pointing towards an upsurge of investor interest in the stock market. So far in 2014, the party has continued as stocks have climbed another +8.4% for the
Our "Correlation Economics" website has already amassed more than hundred correlations describing stock and bond valuations, gold, debt, deficits, the mortgage market, employment, GDP, etc.
In this article I'll go over the most prominent market moving correlations to give a thorough market outlook for the coming months. This way, investors know what to expect in the future. I'll also briefly touch my favorite correlations in the process.
1) Let's start with the stock market.
I've indicated many times already, that's we're in a stock market bubble. The Buffett rule says that the ratio of a country's total market valuation to its GDP is a very good indicator of whether the market is undervalued or overvalued. Clearly, today we are overvalued to an extreme of 124%. (Chart created by Gurufocus)
This overvaluation goes even further. While GDP growth expectations are dropping, the overvaluation could keep increasing in the
U.S. stocks retreated in July and have continued to waver in August. While no one can predict the stock market's movements for certain, I believe the probabilities point to a correction (a 10% drop), rather than a crash (a decline of 20% or more).
The main reasons I'm skeptical about a bear market include the following:
1. Corrections are temporary - Corrections are short-term interruptions within longer-term uptrends, whereas a bear market is a prolonged downturn. I believe the market's current pullback is likely to be short-lived because bull markets end in recessions, which are typically signaled by an inverted yield curve. Presently, I'm not seeing strong risk factors for either an economic downturn or yields on short-term rates moving above those of long-term rates. In fact, based on the July reading of the Institute for Supply Management (ISM) Manufacturing Index, recession looks two to three years