By Brian McKay
A lot of people have been telling me how bullish they are lately. Not this guy. When markets seem lofty and everyone is making money, I’m out. There is a lot going on right now in the middle of earnings season, but this market has continued to neglect everything that is cause for concern. If a correction doesn’t start within the next three weeks, please accept my permission to sit me down in the dunk cage.
Here are five good reasons to either bail or short:
P/E ratios are ridiculous: According to Marketwatch, two thirds of investors think stocks are overvalued. The current S&P Price to Earnings ratio as of June 21st, 2017 is 26.15 whereas a normal ratio is about 16.5. Arguments have been made that this is the norm in an era of low rates. Not a chance. It’s irrational in the eyes of this writer.
The Republican agenda is going nowhere and hurdles are ahead: The widely panned and out of touch health care plan isn’t going to happen. Next to be attempted is tax reform. That too looks to be a challenge. Republicans have traditionally shown themselves able to reduce taxes but not cut spending. In order to get a tax plan through this year, the party needs to appease both moderate and far right factions. On top of this, they have to make the plan pass the test of “reconciliation”, in order to get it through without a need for votes from Democrats. While Wall Street is wringing its hands to see corporate tax rates drop to 15%, this rate potentially adds too much to the deficit for some Republicans on the Hill to stomach. A market seeing a first year with no major legislative achievements will have to sound the alert.
Political instability has massive potential to erupt: With Friday’s speculation on President Trump trying to fire Robert Mueller and possibly preemptively pardon his family members and himself, it shows how close the country could be to a Constitutional crisis. No one knows for certain what, if any, ties the President might have with Russia, but his desire to keep his finances off limits certainly leads to speculation. A resignation could mitigate the impact, but does anyone really expect the President to admit to defeat and just leave office? Markets typically react to geo political issues late. This is certainly the case right now.
A budget showdown: Past government budget showdowns have cost this country billions and even resulted in the downgrade of US debt. September looks to have the potential for this to happen once again with the majority party severely fractured right now. Markets could start expecting this and reflecting it ahead of time if we see the issues mentioned in the prior point come about.
The Fed: Markets have let rate increases just bounce off as of late. Will this continue? Inflation is more stable than expected but the Fed still needs a tool to utilize should a long overdue recession come about. Another ¼ point increase this year is likely and volatility might just be high enough that it matters.
On the flip side, earnings are still strong. The question is whether that is enough to buoy stocks into August. The opinion of this investor is a resounding NO.
Going long volatility is the personal preference now. It is always better to be early than late.