Market Now Entering Mania Phase

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Posted by Financial Sense

on Thursday, 11 January 2018 07:12

Ed Note: Make sure to read down to "Watch For Bond Market Troubles" & Commodities Entering New Bull Market

We’ve witnessed remarkable stock market performance in the last year and a half, with the Dow Industrials and S&P 500 not experiencing a 3 percent or greater pullback during this parabolic rally.

“This has never happened before in history,” Dorsch told Financial Sense Newshour. “There’s virtually no fear in the market for a pullback,” Dorsch said. “The only fear is the fear of missing out. This is a mania, which normally occurs at the tail end of a long-term bull market. Those who have missed the rally capitulate and begin to do things that they might not otherwise contemplate doing.”

Screen Shot 2018-01-11 at 7.15.58 AM

Markets are psychologically driven, he noted, but from a policy perspective, central banks and corporations are certainly helping to fuel prices higher.

“We have negative interest rates wherever we look, either on a real basis discounted for inflation or in nominal terms,” he said.

Combined with stock buybacks by S&P 500 companies to the tune of $3.5 trillion over the last 8 years, retiring 18 percent of all floating shares in the market since 2009, it isn’t surprising stocks have marched higher.

Now, with the recent GOP tax cuts reducing the corporate rate and freeing $2.5 trillion sitting overseas for potentially more stock buybacks, we’re looking at a burgeoning mania in the works.

Watch for Bond Market Troubles

The consensus opinion is for the S&P to hit the 3,000 level, Dorsch stated.

With everything going well, only the Federal Reserve or an exogenous, unforeseen event can take the punch bowl away, Dorsch added. Barring these possibilities, we’ll see higher oil prices, faster inflation, and increased pressure on the Fed to raise interest rates.

However, there is one other possible villain in this story: that’s if the bond market begins to fall apart. If bond vigilantes raise 10-year bond yields to 3 percent, which is a good possibility, it could also hurt markets.

“If there’s going to be a correction, it’s going to be sharply higher interest rates caused by the bond market, forcing the Fed to take stronger action to fight inflation,” Dorsch said. “That would be the bearish catalyst. If that does not occur, if interest rates stay relatively low, then this mania will continue.”

Commodities Entering New Bull Market

Dorsch expects crude to hit somewhere between $65 and $70 a barrel, and for gold to move higher with commodities generally to around the $1,400 level. His basic scenario for the commodity markets is that this cycle is turning, he stated, and the 4.5-year downturn is over.

He also expects that President Trump’s administration is reliant on the stock market and will, therefore, seek to continue to keep the bull going.

“The stock market now has become too big to fail,” he said. “His presidency may even hang on the direction of the stock market—he’s become so committed to it.”

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