In 2017, the Dow index returned just over 28%. However, when growth begins to happen at an accelerated rate, many bears begin to speculate the market will come crashing back down. Current conditions in the U.S. economy, stock market, bond market, and dollar are all eerie similar to 1987, which is causing some experts to sound the alarm of a possible crash on the horizon.
The popular SPDR S&P 500 ETF (NYSEArca: SPY) reached a 52 week high of $286.63 in January. The market’s success in 2017 has garnered the interest of investors, who worry they may be missing out on the returns of the bull run. The influx of capital has resulted in a period of prolonged equity growth, but are the gains justified?
Maintaining a bull run usually requires that stocks have a good reason to rise. If investors are funneling their money into the stock market on fear of missing out, prices can become unjustifiably inflated. The realization that the prices are inflated for unjust reasons later on could result in a market meltdown. In fact, one of the largest bull runs of all time was followed by a 49% plummet from March of 2000 to October of 2002.
An additional factor drawing the attention of financial managers is the decline in 10-year treasury bonds. The bonds currently sit at a four year low. The Leuthold research group has designed an indicator intended to signal when declines in credit should worry equity investors. The signal is known as the Dow Bond Oscillator, and just recently, it has indicated investors should sell.
This signal came ahead of the market decline this past week. Shortly after the oscillator indicated selling conditions, the S&P 500 declined more in two days than it had since August. This shows the Dow Bond Oscillator is reliable to a degree. Despite this, Leuthold subscribes to the belief markets may continue to rise while credit weakens.
Meanwhile, there are whispers among Wall Street that the Federal Reserve does not have a handle on inflation. Unemployment is at its lowest in 17 years, and the hourly wage is rising at its highest rate in eight years. Previously, federal reserve chairwoman Janet Yellen had been moving forward cautiously, slowly raising interest rates. Janet Yellen has recently been replaced by a newcomer of President Trump’s choosing, Jerome Powell. He has been a member of the Federal Reserve since 2012, but investors are uncertain how he will handle the changing economic climate at hand.
Article By: Frank Marino-Moore