Stocks and other financial assets have soared to record highs, adding greatly to the personal wealth of investors. Nonetheless, this may pose a danger to the economy, according to Joe LaVorgna, chief economist at Natixis CIB Americas, as reported by CNBC. He indicates that the ratio of household net worth to disposable personal income is at an all-time high. Regarding its previous tops in 2000 and 2006, he observed, in a note to clients quoted by CNBC: "A recession started four quarters from the peak of the former and eight quarters from the zenith in the latter."
Soaring Asset Values
Since the Great Recession ended in June 2009, the value of financial assets held by U.S. households has grown by a staggering $33.9 trillion, versus a $10.9 trillion increase in nonfinancial assets such as homes and autos, per Federal Reserve data cited by LaVorgna, CNBC says. As of the fourth quarter, per the same sources, U.S. households had a combined net worth of $98.75 trillion, a record 6.79 times their combined disposable income of $14.55 trillion.
The previous highs for this ratio were 6.12 in the first quarter of 2000 and 6.51 in the first quarter of 2006. From the late 1940s to the late 1990s, the ratio had been in a range of 4.5 to 5.5, averaging about 5.0, again per the same sources.
From the end of the last bear market at the close on March 9, 2009, through the close on March 21, 2018, the S&P 500 Index (SPX) is up by 301%. LaVorga notes that the Great Recession ended in June 2009. From its low close in that month, on June 22, 2009, the S&P 500 has gained 204%.
Fed-Induced Asset Inflation
Much of the dramatic rise in the value of financial assets has been the result of quantitative easing pursued by the Federal Reserve and other central banks around the world. This program sent interest rates to historically low, near-zero, levels through aggressive purchases of bonds, and was designed to stem the financial crisis of 2008 and to combat the Great Recession that started in 2007.
Now the Fed is pledged to reverse course, reducing its massive holdings of bonds, which should send interest rates upwards. Meanwhile, former Fed Chair Alan Greenspan has warned of a dangerous bond market bubble that was produced by quantitative easing, and which is bound to pop once that program is unwound. (For more, see also: Stocks' Big Threat Is a Bond Collapse: Greenspan.)
Now the Fed Tightens
On March 21, the Fed announced a quarter point increase in the Fed Funds Rate, setting a new target range of 1.5% to 1.75%, per another CNBC report. The is the sixth rate hike since December 2015, CNBC adds, also noting the market anticipates three more increases in 2018.
"Given the importance of asset prices in the economy and the formulation of monetary policy, Fed folks need to be careful in not sending too hawkish a message when they raise official interest rates," LaVorgna wrote, per CNBC. He continued: "[Fed Chair] Powell needs to be mindful of the current backdrop and not signal aggressive rate hikes to come. Otherwise, stock prices and the economy are in trouble."
Multiple Red Flags
There are various other indicators that the stock market may be near a top, and that a bear market may be imminent. For one, according to the CAPE ratio devised by Nobel Laureate economist Robert Shiller, the valuation of U.S. stocks is now at their second-highest level ever, exceeded only in the Dotcom Bubble years. (For more, see also: Why the 1929 Stock Market Crash Could Happen In 2018.)
Second, hot stocks and hot sectors, most notably technology, have become overcrowded. Even longtime technology bull Paul Meeks see dangers lurking. (For more, see also: Long-Time Tech Analyst Advises Sector Overvalued.)
Third, momentum investing has become increasingly popular. Stocks that have risen the most are being chased for that reason alone, regardless of fundamentals. (For more, see also: Why Stock Investors Play the Risky 'Momentum' Game.)
Fourth, over-leveraged investors with record levels of margin debt pose risks to themselves and to the broader market, billionaire investing guru Warren Buffett warns. The previous high for margin debt was during the Dotcom Bubble. (For more, see also: Buffett Warns Investors To Avoid Borrowing Money To Buy Stocks.)
Fifth, former FDIC head Sheila Bair is among those who fear a repeat of the 2008 financial crisis. She finds some recent bank deregulation as being ill-timed and ill-conceived, and sees trouble from rapidly rising debt among consumers, students and the federal government. Other observers worry that some causes of the crisis were never fixed. (For more, see also: Bank Deregulation Could Cause Repeat of 2008 Crisis.)
Lastly, there are multiple indications that world economic growth may be peaking. The onset of a recession typically is a catalyst for bear market conditions. (For more, see also: An Economic 'Shock' Could Derail the Bull Market.)