These Signs of Market Trouble Are Looming

Editor's Note: By now you're familiar with Michael E. Lewitt of The Credit Strategist. We  love his work. Today, he has a special report on current, troubling conditions  at this late stage - and a dire warning for investors who may be unprepared.  Here's Michael... 

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"Markets are priced to perfection. 

Signs of late-cycle behavior and thinking are abundant. 

The latest example came from BMO's strategist Brian Belski, who published a report arguing that the bull market in stocks will continue for another ten years with annual gains of 10.5%. 

This is the type of report that appears at market peaks. Despite the fact that it was dressed up in statistics and produced by a respectable brokerage house, this isn't a serious piece of research; it is nonsense and anyone who takes it seriously and invests based on its conclusions deserves the losses that will follow."

The above is excerpted from a recent report I produced for my Credit Strategist readers. I wanted to share with you some of my thinking on rapidly coalescing signs that point to growing cracks in the façade of a healthy market…

Be Wary of "Growth" in These Propped-Up Indices

Too much of today's market forecasting is focused on the wrong data, and even more is just outright bad analysis as we saw above with Mr. Belski's report.

We may not be looking at a nominal-value market bubble, but there are signs valuations are out of touch with realities in the credit markets and relative to our managed interest rate environment. The combination spells losses for investors who don't, or won't, prepare for changes ahead.

Here is why I'm concerned about the "everything is rosy" scenario, and what I want you to do to protect yourself when the music stops.

Still, the epic stock market rally continues to churn. Year to date…the S&P 500 is up over 7% …the Nasdaq Composite Index is up 6.3% and the small cap Russell 2000 index is ahead, despite some serious noise around the rally:

  • The situation in Iraq and Syria continues to deteriorate, yet investors remain squarely focused on supportive monetary policies around the world.
  • Investors believe inflation is not going to be a problem even though it already is in the real world outside official government statistics, and that corporate earnings will continue to rise on the back of low borrowing cost, low effective tax rates, weak wage growth and stock buybacks, and other non-organic factors.

Stocks remain, on the face of it, far more attractive than other asset classes such as bonds, but relative value does not equate to absolute value.

How Will Your Investments Respond to "Normalizing" Interest Rates?

The first half of 2014 has seen a historic rally across all asset classes. Six important gauges of world stock, bond, and commodity performance are headed for gains for this period, the first time that has happened since 1993. Through July 8, gold was up 8.8%, the Dow Jones UBS Commodity Index 5.5%, the MSCI World Index of developed world shares 4.8%, and the MSCI Emerging Markets Index just over 3%.

Not every market in the world is up – the Japanese stock market is down a few percent. But for the most part all asset classes have rallied as a result of unprecedented stimulus efforts by global central banks.

The question, of course, is how long those efforts will continue and what happens when they stop. So what's the catalyst for a change?

Join the conversation. Click here to jump to comments…

About the Author

Wall Street and Hedge Fund veteran publishes the highly-regarded The Credit Strategist. Connects the disparate parts of an intricate economy with unparalleled clarity.

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  1. Jeff P. from Canada | July 11, 2014

    A 2% increase in interest rates will make it impossible for the U.S. government to pay the servicing costs on their debt. A then, default or restructure of the debt will cause the markets to tumble.

  2. Brad M | July 11, 2014

    I think the FED's bond and mortgage purchasing program may be resumed, even if quit briefly. First of all, I think the stock market will react negatively, and shortly after that…well the FED will reassure it. Secondly, looking at current student loan debt, rising consumer debt, HELOCS, and a stable ( but still hospitalized ) housing market… a sudden rise in interest rates could be a step back into recession. Also, if rates increase, the government will be sorely tasked to pay the interest on its current debt level. A healthy tax increase for some to cover it? Probably. And once again putting a sandbag on economic growth.

  3. Rich S. | July 12, 2014

    How can a house of cards suggest that everything is ok?

  4. Curtis Edmark | July 18, 2014

    We are in the 3rd biggest stock bubble in history

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