Much like the Great Depression did to the “Greatest Generation,” the financial crisis of 2008 seared the souls of millions of investors. Almost six years after the collapse of Lehman Brothers, professional Cassandras never ceased predicting that the next economic meltdown and a stock market crash is just around the corner.
After all, U.S. stock markets have been in a classic bull market for over five years now.
Instead of gold hitting $5,000 an ounce and the Dow Jones collapsing below 1,000, the S&P 500 has risen 189% from a low of 683 on March 2, 2009, to yesterday’s close of 1,971. The Nasdaq closed yesterday at its highest level since early 2000.
And that’s with the most anti-business U.S. administration since the days of Woodrow Wilson.
The Case Against a Coming Crash
First, let’s review the factors that have supported this surprising bull market.
Most of the global economy has recovered from the very worst of the economic contraction between October 2008 and March 2009. Strong earnings growth, combined with record levels of share buybacks, has boosted companies’ earnings per share. Finally, artificially low interest rates supplying liquidity to the banking sector have served as a tailwind to asset prices around the world.
There are still several contrarians willing to endure the public humiliation of being in the bull camp. The much-reviled Goldman Sachs reckons that another economic collapse is unlikely. Sure, Goldman concedes that the stock market could crash any day. But one of the key preconditions needed for an economic bust is high credit growth. Credit may be accelerating. But in the grand scheme of things, it’s still at pretty low levels. The global economy is more macro-economically stable than headlines would suggest.
Steven Auth of Federated Investors is another brave bull who thinks the S&P 500 will hit 2,100 by the end of 2014. Auth also predicts the S&P 500 will reach 2,500 within the next 18 months to two years. The combination of growth, bond rates and perceptions of risk will continue to propel the U.S. stock market ahead. With the Fed paranoid about tightening rates too soon, as it did in 1937, a liquidity backdrop for stocks will remain favorable.
The Case for a Coming Crash
Yale University Professor — and now Nobel Laureate — Robert J. Shiller is a famous stock market bear. He is one of the brains behind the Cyclically Adjusted Price Earnings (CAPE) ratio — a smoothed 10-year average price-to-earnings ratio.
Nicholas Vardy is currently editor of the monthly investment newsletter, The Alpha Investor Letter, which provides longer-term global investments. He also writes two weekly trading services, Triple Digit Trader and Bull Market Alert, which focus on making short-term profits in the hottest markets in the world.
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