Technically Speaking: BTFD Or Is This Time Different?

Since the end of the financial crisis, each market decline has been met with support by the Federal Reserve either through “verbal accommodation” or directly through “monetary interventions.”

Not surprisingly, investors have become “trained” each “dip” in the market is a reason to “buy” even in the areas with the least fundamental quality. The perception of “risk” has been entirely eliminated which has once again brought about a sense “this time is different.” Of course, this is not unusual as we have seen it at each major bull market peak throughout history.

“But Lance, the Fed’s balance sheet has been flat since the end of QE-3, but the markets continue to rise. So, that is clearly a sign of a recovering economy and earnings at work.” 

Not so fast.

The Fed’s ongoing “reinvestment program” has been very successful at facilitating support precisely when it seems to be needed most.

Of course, as noted above, global Central Banks have also been extremely accommodative of support asset markets as well.

This is nothing new, just a reminder this isn’t “your father’s market,” and assuming the market is functioning based on underlying fundamentals is a bit short-sighted, to say the least.

The problem, however, comes when the Fed begins to stop those reinvestment processes. As shown above, where support has been previously provided to offset potential declines, such support will no longer be available. Such will eventually return the view of the markets back to the fundamentals. It is there we find more troubling issues.

The table below from Goldman Sachs shows a variety of measures of current valuation. With the exception of Free Cash Flow, every other measure suggests investors are “over paying for playing” currently.

Economically, the metrics also suggest that we are very near the end of the current bull market cycle. The chart below shows the percentage change in inflation, GDP, employment and interest rates leading up to each of the last two recessionary breaks in the market.

Importantly, note that falling inflationary pressures tend to have an adverse effect on economic growth. This suggests, just as it did both times previously, the recent uptick in economic growth will likely prove to be very transient.