- Screenshot via Bloomberg TV
Gluskin Sheff’s David Rosenberg is concerned about a stock market bubble.
In a note on Friday, Rosenberg shared 10 reasons to be cautious on the US stock market, which are also classic signposts of market tops:
Valuations are stretched by most measures. They include the Shiller price-to-earnings ratio, which has been this high only during the dot-com bubble of 2000 and the 1929 market crash. However, it’s not a reliable indicator of market tops. Leverage is extended. Margin debt, or the dollar volume of stocks bought with borrowed money, surged just before the US election to a record high. Retail investors are suddenly rushing to buy. Following eight years of net outflows, they poured nearly $80 billion into mutual funds and exchange-traded funds in the postelection rally. This year, however, corporate insiders have been selling at the fastest pace in nearly 30 years. The technicals are showing vulnerability. From Monday through Thursday last week, the number of stocks making 52-week lows surpassed new highs. It was the longest streak since November 4 and was a sign of a toppy market, Rosenberg said. Also, the S&P 500 has traded as much as 10% above its 200-day moving average. Investors are complacent, and it seems like the calm before the storm. The Chicago Board Options Exchange volatility index, or VIX, remains unusually low. The S&P 500 has not swung 1% intraday for almost 60 days, the longest streak in at least 35 years. The Fed is raising rates. The rise in short-term yields could invert the yield curve before the Fed Funds rate is at 3%. An inverted curve – which reflects investors’ expectations for slower future growth – is seen as a precursor of recession. Inflation is picking up. The core personal consumption expenditures index is at a 30-month high. Though it is likely not sustainable, it is a “classic late-game signpost.” The gap between economic growth and sentiment is large. The pace of policy change in Washington could disappoint investors. Households have over-ownership. Their exposure to the stock market is 42% above the norm, Rosenberg said. Credit markets are frothy. The compensation investors demand for choosing risky US high-yield bonds over risk-free assets – the risk premium – is widening.