In other words, the market (S&P 1690), now standing within 1% of an all-time high, has been forgiving and has looked toward the future with optimism.
Based on the concerns and headwinds discussed this morning, I would contend that the market's P/E multiple now likely resides near the high end of the range expected in 2013.
Below are my top 10 reasons why the market may have peaked for the year. (No. 1- No.6 are fundamental challenges, No. 7-No. 9 are technical issues, and No. 10 is concerned with sentiment.)
1. Rising interest rates pose more of a threat to growth than many believe.
At the core of my pessimism is that the U.S. economy will not likely be able to hold up in the face of an increase in interest rates and a higher cost of capital. The
four-year-plus strategy of quantitative easing is growing increasingly more ineffective -- it has neither created jobs nor stimulated innovation. (Apparently, the
San Francisco Fed now agrees
.) Kick-starting asset prices and the production of economic growth of only 2% (in real terms) underscore the failure of trickle-down monetary policy and simply do not guarantee a self-sustaining recovery that will continue under its own momentum.
As I have previously written, the stock market, the consumer and the corporate and public sectors are
addicted to low interest rates
To date, the market has comfortably absorbed a doubling in the five-year U.S. note yield and a 110-basis-point increase in the 10-year U.S. note yield. The next rise in rates, however, will likely exact more of an economic and market toll (particularly on housing).
If you don't think the market is the beneficiary of quantitative easing and you think tapering is nonevent, consider that the Fed has printed $600 billion of new money this year. This has generated only a 1.5% increase in GDP or $300 billion this year. But thus far in 2013, there has been a 20% rise in the value of U.S. stocks -- that is a rise of $3.5 trillion (on a base of $20 trillion total market value). So, a change of policy (i.e., tapering), is more significant and impactful than most argue.
The "taper is not tightening" argument is semantics because less asset purchases equals less accommodation. Moreover, it is now the markets that have tightened policy over the last two months, as the Fed has begun to lose control of rates. (Note: The yield on the 10-year U.S. note resides at 2.66% this morning, only a few basis points from the recent high yield. In my judgment we are close to the line in the sand, where rates will adversely impact economic activity.)