About a month ago, I wrote an article for this blog that asked the question: is it a correction, or something else? That something else I implied was a potential pending implosion of the stock market, given that the bull market has been going continuously up for almost nine years, and that since the correction on January 26th, we have been below the market peak. It is notoriously difficult to call a market peak (or a market bottom, for that matter). However, I am not the only one stating that investors need to be very careful in these turbulent times.
Famous technology investor Paul Meeks said in an interview on Friday, March 9th, that technology stocks could see a 10 to 20 percent correction could occur “at any time.” He went on to say that he was looking at it as a potential buying opportunity; however, I contend that there is another saying about stocks that you should keep in mind, and that is “never try to catch a falling knife.”
Another well-known investor, David Stockman, stated on CNBC’s “Future’s Now” program that there is trouble ahead for the market. He believes this is the case because of several economic challenges: the tax cut will cause ballooning deficits, the high earnings multiple this late in the business cycle is a record, and monetary and fiscal policy that is going to upend the bond market. He predicted a 40-70% drop in the market late last year, and a 34% drop last summer.
While these dire warnings have yet to come to pass, they are getting harder to ignore. What rational reason could there be for the market to continually go up, in spite of interest rate hikes, inflation fears, tax cuts and ballooning deficits, wage increases, labor shortages, and the “unwinding” of the Fed’s $4.5 trillion balance sheet? There is only one answer to that question: stock buy-backs. Companies have been using their tax savings from the Trump tax reform act to buy back their own shares (and pushing up their stock price) at a rate that is twice what it was last year, and at a pace that will set a record value for repurchasing of $800 billion. How long will these repurchasing programs keep the market afloat?