A day after President Donald Trump’s 77-minute press conference, the markets continued to rise ahead of the President’s Day weekend.
The Dow Jones industrial average closed at 20,624. And, according to a Bank of America Merrill Lynch report, investors remain bullish — pumping some $500 million into long-only equity funds over the past week, which is a first for the past 12 months.
But, with uncertainty over tax cuts, health care reform and interest rates, some market watchers are saying, “Not so fast.”
According to David Stockman, Office of Management and Budget Director under President Ronald Reagan, a quick change in the markets is coming.
“It is only a matter of when we reach the inflection point, where it becomes obvious to everybody that this is artificial and there is no more [fiscal] stimulus,” Stockman said during an interview on Yahoo Finance’s online show The Final Round.
Looking back to 1999 and the technology heyday, “There had been an eight-year rally, it ended in a thundering crash,” he explained. In 2008, over 40 days, the Russell 2000 “dropped by the equivalent of 60%.”
This is part of a broader pattern, according to Stockman.
“The way this bubble finance works and central bank policy works, it takes nearly seven years on an escalator [up]. It takes about seven weeks on an elevator down,” he stated.
Admittedly, the former congressman says, he has had this view “for years,” but that is because he sees problems in political and financial leadership. “I think what they are doing is wrong,” Stockman said.
“There is going to be a huge correction when the market figures out no Fed [support], no tax stimulus, they’re home alone, and they’ve got the market trading at 26 times trailing earnings and an economy that’s running out of gas, headwinds coming from all over the world, China and so forth,” he explained.
Going even further, Stockman said he sees this happening sooner rather than later, with the Federal Reserve expected to raise interest rates by March 15.
“It’s only a matter of days before this whole thing tips over, because it is basically the machines raging on headlines,” he said.
The author sees an end to the bull run “within days, and certainly by March 15, because that is when the Federal Reserve is going to raise interest rates, finally,” he explained. “They have been dithering for 96 months at the zero bound. By their Keynesian lights they are at full employment. They have no choice.”
The deficit hawk also sees government spending as an issue.
A second factor that will negatively impact equities, he says, when the debt ceiling, “which has been in suspension for the last year, crystalizes, goes back into effect. Suddenly people will realize that there is $200 billion of cash in the U.S Treasury, and it is running out very quickly,” Stockman said.
“There is no tax cut coming. It’s phenomenal, it’s massive, it’s a great hope, probably in some alternative world it would be a good thing to do – but [Trump] is not going to get it through Congress,” he explained.