Bull and Bear

NEWS WRAP - Too Much of a Good Thing Could Signal a Melt-up

Commentators have expressed concern that stocks could be getting too expensive, with some predicting that if the trend continues it could lead to an unwelcome and "nasty" correction*. This follows both the Nasdaq and the S&P 500 recently hitting historic highs, while the Dow is only a half-percentage point rise from the same.

Edward Yardeni, a respected analyst of many years' experience, recently released his market brief for November 2019 and warned that if the S&P forward earnings multiple reaches 19 or 20 – it is currently at 17, while a figure of 15 to 16 is more typical – it could be a sign that equities are significantly overvalued.

Yardeni further said that if this was indeed the case, it could be indicative of a "melt-up"*; a situation in which the sale price of one or multiple asset classes is driven by heat-chasing investors rather than by genuine economic value.

"I just don't want too much of a good thing here. I'd like this bull market to continue at a leisurely pace not in a melt-up fashion," Yardeni recently told CNBC's Trading Nation. "That's actually the risk." *

Yardeni previously set the S&P a target of 3,100 by the end of the year – last week it closed at 3,066 – and has set a 3,500 target for 2020. He says that if the market reaches 3,500 ahead of his prediction, he may consider selling many of his shares rather than remaining invested in a market at risk of collapse.

However, it seems that he is flirting with the idea of doing that most difficult and dangerous of all things: timing the market. Furthermore, he says that, on balance, he expects the market to continue to rise past 2020, even in the event of short-term volatility caused by political upheaval in the United States.

"I'm not convinced that if Trump loses and a Democrat wins that it necessarily implies a bear market and a recession," said Yardeni. "But I think initially the market would not react well to a change."

However, it may matter little what he, and indeed any other expert, thinks as more than two-thirds of investors believe that a bear market is on the way. A recent survey by CNBC Invest in You and Survey Monkey found widespread belief in a weakening economy in 2020**.

Nobel-winning economist Robert Shiller believes that talk about the recession could be a self-fulfilling prophecy as the media stories go viral and people talk about the "inverted yield curve" whereby long-term rates are shorter than short-term rates signalling a recession, which in turn creates a likelihood that interest rates will go down in the near to mid-term. Shiller says that the inverted yield curve can cause a recession if people think it will.***

A guiding hand for your retirement plans in light of the negative chatter

Managing a portfolio of assets, including retirement accounts, during times of volatility can be extremely challenging. Discipline and strategy are key.

If you would like help achieving discipline, talk to the financial and retirement planning advisers at Blacktower in the US about how we can help you best structure your wealth and manage your assets so that you can stay solid even during prolonged moments of domestic and global economic uncertainty.

It is important to remember that recessions can be healthy for an economy in the longer term; and as long as you have an enduring plan in place and with the right expat financial advice at hand, it is highly likely that you will reach the other side with your financial goals intact.

For more information about how we can help you, contact Blacktower (US) LLC today.


Disclaimer: The provision of information in this communication is not based on your individual circumstances and does not constitute investment advice.


* https://www.cnbc.com/2019/11/03/a-market-melt-up-is-becoming-a-real-risk-ed-yardeni-warns.html Accessed 15-11-19

** https://www.cnbc.com/2019/11/11/two-thirds-of-adults-fear-a-recession-could-come-next-year-survey-finds.html Accessed 15-11-19

*** https://www.cnbc.com/2019/10/16/robert-shiller-says-economic-stories-like-fears-of-a-recession-can-go-viral-and-be-self-fulfilling.html Accessed 15-11-19

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