Companies are running out of earnings power. Margins are at record highs. Big investors are selling stocks more than they're buying.
You've heard all of these reasons for why the bull market is closer to ending, but stocks just keep on moving higher. Now with the election taking some uncertainty off the table, stocks have resumed their rally, with the S&P 500 gaining nearly 4% since Donald Trump became President-elect. Let the good times roll, right?
That's all well and good, but what if we really are near the end? What happens then?
"I think there's tremendous pressure from the populous and political players to raise rates in December," said Don Schreiber, CEO, co-portfolio of WBI, which has $2.1 billion in assets under management. "If we raise rates, the theory is that we will grow faster. We had a 2% growth rate in 2015, the Fed raised 25 basis points and cut the GDP growth rate in half. If they raise again, the economy will get crushed."
Currently, traders are betting on a rate hike from the Federal Reserve. A look at the fed funds futures rate, a measure of how likely it will be the Federal Open Market Committee raises rates, stands at just over a 90% chance of a rate hike in December. This comes despite concerns that a Trump win would throw off financial markets and send them into haywire, something that has not happened as of yet.
Comments from various Fed officials in recent days make it more likely than not we'll get another rate hike next month, when the FOMC concludes its two-day meeting on December 14.
Federal Reserve Bank of Richmond President Jeffrey Lacker said the potential for a boost to fiscal stimulus may lead the Fed to raise rates faster than expected. Federal Reserve Bank of Boston President Eric Rosengren has said only "significant negative news" would prevent the Fed from raising rates next month. Rosengren is a voting member of the FOMC in 2016, while Lacker is not.
President-elect Trump has called for a massive boost to infrastructure spending, with his economic plan calling for investments of as much as $500 billion, perhaps more when all is finalized. The theory is that increased spending on infrastructure is likely to lead to higher inflation, causing the Fed to raise rates.
Currently, the market gives the highest probability of the fed fund futures rate being between 75 and 100 basis points, implying two rate hikes in 2017 in addition to the one that is expected in December.
Countries like Japan have been mired in economic stagflation for years, with low growth rates and concerns about deflation.
The Bank of Japan has taken conventional and unconventional means to promote growth and boost inflation, to mixed results. In September, the Japanese central bank shifted its policy from buying bonds and ETFs to also targeting Japan's yield curve, a sign that its policies may not have worked as well as they initially believed.
The fear in the U.S. is not that the Federal Reserve will continue to be unconventional in its policies, but that a rate hike of just 25 basis points will "crush" the economy and cause a recession.
"If the Fed raises in December the economy may not get crushed, but it will slow measurably," Schreiber said. "Just because expectations post-election have been elevated by Trump's proposed pro-growth policies, does not mean that risk has abated. Tax cuts and stimulus measures under the best conditions will take time to develop, enact into law and implement. In the mean time, overvaluation and price reversion risk are still present. The market may provide investors with a very bumpy ride until current uncertainty is removed."
What follows below is an interview with Schreiber. The answers have been lightly edited for brevity and clarity.
TheStreet: What are the reasons for the end of the bull market?
Schreiber: The catalyst for the bull market has been central policy, with zero interest rates. They've been very accommodative, promoting the wealth effect and recreating asset bubbles on purpose. Monetary policy has run its course -- it's typically a quick fix tool coming out of recession and it works really well for two or three years. If you look at 2010, 2011 and 2012, we were averaging north of 2% GDP growth. As we get into 2013, 2014, 2015, you can see a trend line that is pretty negative. We went from 2014 to a bump to 2.4%, then have cascaded lower.
The S&P 500 is at 25 trailing earnings, which is the second most overvalued point in last 100 years. It was higher in 1999, before the dot-com bubble exploded. The fundamentals for last six quarters have been weak and are not marginally improving. Every single time in the past we've had four or more negative quarters in earnings, we've had a recession.
The second catalyst is stock buybacks. Institutional and private investors have been selling stock and raising cash. The catalyst for stock price momentum has been corporate buybacks. Companies buy back shares to make their earnings look better instead of investing future growth and expanding the footprint for their business. They've chosen to channel all their earnings they have and cash on buybacks. That trend is weakening and quarter-over-quarter, the trend has declined about $40 billion.
TheStreet: What should investors be doing to prepare?
Schreiber: Investors always wait too long until the bear market trend has already shown itself -- they jump off a speeding train. I think U.S. investors need to adjust the risk levels in their portfolios.
We've seen a huge move to passive indexing that occurs during bull markets. I think investors need to minimize risk, raise cash and find investment strategies that have risk mitigation built in. When you lose capital, it's difficult to overcome capital losses.
TheStreet: What stocks or ETFs are you recommending?
Schreiber: We have a number of products retail investors can access.
For mutual funds, we have a conservatively managed portfolio, WBBX. For ETFs, we have two very active managed risk profile for both bonds and stocks. If we do indeed get the fiscal stimulus, we're to get a pick up in inflation and that will be a dramatic headwind for bond investors if the FOMC raises rates.
Two of our flagships, WBI Tactical Income Shares ETF (WBII) and WBI Tactical High Income Shares ETF (WBIH) both have over $200 million in assets under management. They take advantage of high dividend stocks and fixed income where you can actively manage risk to own both bonds and stocks to prevent significant losses of capital and take advantage of positive market trends.
What we've found is higher-yielding stocks are in the small and mid-cap size names. Most stocks that pay dividends, even tech stocks, you can invest in a broad selection across sectors that have pretty decent yield and not sacrifice capital appreciation.
TheStreet: Is there anything there that would make you rethink your mindset?
Schreiber: I'm not rooting for a bear market, as our business does better in bull market trends. In a bear market, we'll protect. Central banks are trying to prevent a looming financial crisis. If we can find the path to fiscal stimulus post-election very quickly, we might be able to avoid recession.
TheStreet: Where do you see the S&P 500 at the end of 2017?
Schreiber: The typical bear market has been around an average of a 45% decline on the S&P 500. That would take you down to around 1,200 or 1,300 f this bear market is your typical 40+% decline. Because of the distortion in price, you could have a bigger-than-normal bear market correction.
I don't know what the turning point is, but when it turns from optimism to persist, we'll have a bigger correct than people expect.