The stock market has rallied in recent months despite a growing list of negatives that include tariffs, trade tensions, rising interest rates and valuations that are still high by historical standards. Jack Ablin, co-founder and chief investment officer (CIO) of Cresset Wealth Advisors sees the market breaking out to new record highs, based on five indicators, per an interview with CNBC. One of these is momentum, about which he said: "a market in motion tends to stay in motion unless otherwise acted upon. You look at something just as simple as the 200-day moving average. We really haven't even crossed below that even with two or three downdrafts this year. So, all in all, momentum signals suggests to you stay in this risk on position for now."
Stocks May Break to New Records
|Stock Index||Record High||Date||Aug. 14 Open||Gain Needed to Reach High|
|S&P 500 Index (SPX)||2,872.87||Jan. 26||2,827.88||1.6%|
|Dow Jones Industrial Average (DJIA)||26,616.71||Jan. 26||25,215.61||5.6%|
|Nasdaq 100 Index (NDX)||7,511.39||July 25||7,430.45||1.1%|
|Nasdaq Composite Index (IXIC)||7,933.31||July 25||7,487.88||5.9%|
|Russell 2000 Index (RUT)||1,708.56||July 10||1,676.19||1.9%|
Source: Yahoo Finance; record highs based on intraday trading.
In addition to momentum, Ablin also cited positive signals related to valuation, the economy, liquidity and investor psychology. Jason Hunter, a technical analyst with JPMorgan, sees the S&P 500 racing ahead to a value of 2,950 by late summer or early fall, based on his reading of the charts, per another CNBC report. Meanwhile, the current bull market is on the verge of becoming the longest ever, according to Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch. (For more, see also: Stock Market Nears Longest Bull Run in History.)
Ablin asserted that, taking a "more shorter-term view" based on forward P/E ratios, stocks actually are relatively cheap. He noted that, despite a year-over-year (YOY) increase of about 26% in S&P 500 earnings, the index is up by only around 6% so far this year. While acknowledging that earnings growth can't continue at this pace, he nonetheless believes that investor skepticism has led to "a little bit of a discount going on."
With U.S. GDP growing at an annualized rate of better than 4%, and most key economic indicators delivering positive signals, Ablin cited these as key drivers of future stock gains. "We are still beating economists' forecasts, and the economic environment is still conducive for risk-taking," he observed.
Regarding the amount of money available to borrow, spend or invest, Ablin said, "we're actually squarely back in the middle of easy money again." Liquidity is a major prop to asset prices, and he notes that declining liquidity "generally has been an early warning indicator," but often with long lead times. For example, he noted, liquidity fell over the course of four quarters prior to the 2008 financial crisis.
The degree of bullishness or bearishness among investors is a widely-used contrarian indicator. While some surveys point to worrisome levels of bullishness right now, Ablin countered: "investors are skeptical. It's not an extreme. They're roughly in the second quartile of their bullish-bearish range towards the bearish range."
The Skeptical View
While Ablin gets upbeat signals from his key indicators, others disagree. Longtime market watcher Mark Hulbert recently listed eight indicators of his own, with strong predictive ability based on history, that paint a very different picture of rampant stock market overvaluation and excessive investor confidence. Among these is a valuation metric favored by Warren Buffett. Even if stocks do manage to advance to new record highs, if this is not the result of fundamental concerns going away, such as those related to trade, economic growth and asset valuations, the risk of a subsequent market plunge will not have gone away.
Meanwhile, a growing list of investment professionals and stock market pundits have been issuing bearish warnings, the most ominous of them coming from John Hussman, who foresees a market crash on the order of 60% down from the highs. Michael Wilson, chief U.S. equity strategist at Morgan Stanley, sees "a false sense of security in the market" and expects a big selloff, the worst since late January and early February, to be imminent. (For more, see also: 'Buffett Indicator' Spells Bad News for Stock Investors.)