The market ebbs and flows. One day it’s up. One day it’s down. Just like waves in the ocean.
Sometimes a rising tide spans years, lifting everything in sight. Only occasionally receding, flushing out the weak hands until it resumes its surge.
Last week the tide started to recede a bit. This time due to fears of regional banks showing signs of stress. In some cases, these banks have bad debt on their books. And those cracks are starting to show.
So investors are selling anything and everything. It’s a sell now, ask questions later mentality.
But in this 15-plus year bull market, it may be just another pullback before the next surge. Something I discussed in the August 25 edition of The Strategic Edge.
In that article, I told you how this all started when then Chairman of the Federal Reserve Benjamin S. Bernanke wrote an opinion piece for the Washington Post.
Good ol’ helicopter Ben as we like to call him told us the playbook. He knew he was about to light the markets on fire.
In his op-ed, he went on to say:
“[…] higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”
The effects of that policy and his “virtuous circle” are still with us today.
But you could even argue it had its roots much further back. All the way back to his predecessor and the original money machine, Alan Greenspan.
The “Greenspan Put”
Alan Greenspan was the 13th chairman of the Federal Reserve. He served in that role from 1987 until 2006 when Ben Bernanke took over.
Incidentally, he took over as Fed chair in August 1987, just months before the infamous Black Monday stock market crash on October 19, 1987.
To this day, the Black Monday crash is the largest single-day percentage drop in U.S. stock market history. It saw the Dow Jones Industrial Average fall 22.6% on the day.
On that day, Greenspan was in the air on his way to give a speech in Dallas. But once he touched down, he called a meeting with senior Fed officials to come up with a plan.
The next morning, with one sentence, Greenspan changed the game forever. He said:
“The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.”
It was game on. The Fed basically told investors, “We got your back.” It was the start of the infamous “Greenspan Put.”
During his tenure, Alan Greenspan changed the way the Federal Reserve functioned. It led to more direct intervention in financial markets. Leading to bigger booms and bigger busts.
More importantly, it paved the way for future Fed chairs to do the same.
Fed chairs like Ben Bernanke who did more for markets than Alan Greenspan could ever hope. And now current Fed chair Jerome Powell who – after an about face on interest rates – changed the Fed’s focus from inflation to employment.
Something that’s forcing the Fed to lower interest rates after years of higher for longer.
What happens next is anyone’s guess. Betting markets have the Fed cutting rates by a quarter point at least once more before the end of the year. Some think it could be a half point cut.
Regardless, one thing is for certain, if the Fed has its way, the market will get its injection to keep up its current surge.
What Comes Next
As I write, the S&P 500 Index is up about 15% so far this year. And it has some investors nervous about what comes next.
Every surge brings out more and more bearish voices. Understandably so. Yet every drop has them warning that this is the one. The one that will take down the entire market.
Just like it did in the dotcom bust where we saw insane valuations from all corners of the market. Especially in the tech sector.
Overall, the tech-heavy Nasdaq Index surged more than 900% between 1990 and the dotcom bubble top in March of 2000. When it ended, the Nasdaq fell 78% from its high. It took just about everything with it.
One of the most famous examples – and reactions – from that period was from Sun Microsystems and its CEO Scott McNealy.
From a peak of $64 per share – valuing the company at around $200 billion – the stock plummeted to $5 per share.
After the crash, in a now infamous episode during an interview, Scott McNealy said:
At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?
His point was as tech stocks entered a mania phase, it would be impossible for them to grow into their lofty valuations. It was inevitable that they would crash back down to earth. Just like they did in past episodes.
Yes, we’re seeing some manias in certain corners of the market today. Like in the nuclear sector. Just take a look at this chart of small modular reactor (SMR) company Oklo (OKLO) which still doesn’t have approval for its SMR design.
It’s a parabolic move. But every time you think it’s over, it just powers higher.
I don’t doubt that we’ll eventually see some sort of crash in the future. When it comes is anyone’s guess. But just looking around today, I still believe stocks will be higher a year from now.
Partly for the reasons I discussed on September 24. And partly because while stocks seem expensive, they still have room to head even higher.
In fact, the forward price-to-earnings (PE) ratio of the S&P 500 is about 22 right now. When the dotcom bubble reached its peak, the PE ratio of the S&P 500 was about 30.
It may be worth taking some precautions. But if I’m right, seeing some of the kinds of gains Premium Members of Strategic Trader are seeing right now – even with this current pullback – is still on the table.
Regards,
Editor, Strategic Trader