The S&P 500 index closed at 2896.74 points at the end of last night's trading activity on Wall Street.
Yes, Virginia, it's a new record high! Yippee-kay-yay and hallelujah! This is good for stock markets around the world, including Australia. One only has to read the Australian Financial Review to conclude that what happened on Wall Street the night before happens in the Australian equity market the day after the night before (at least at the start of local trade).
Speaking of the AFR, it printed a quote today from LPL Financial: "Fresh highs in the S&P 500 in particular are a signal that the bull market in equities is alive and well ... Two big reasons we see continued equity strength and an extension of this economic cycle are strong earnings and an accommodative Federal Reserve."
I don't think anyone could argue with LPL's rationale. Economic growth in the US had been growing and growing and growing, primarily boosted by Trump's tax cuts and fiscal spend. The US Federal Reserve while on a path towards higher interest rates, is doing it gently, gently.
Don't get me wrong, I want (need) the US equity market to soar to the sky and take our local equity market with it - I have vested interest like all other Australians through my superannuation - but statements like the one made by LPL Financial gets me worried.
This is because it reminds me of that famous (infamous) statement made by the well-known US economist and statistician Irving Fisher a year short of nine decades ago (1929).
Wall Street was breaking record at the time, prompting Fisher to declare that stock prices have "reached what looks like a permanently high plateau." On 24 October, 1929 (nine days after Fisher's pronouncement), Wall Street crashed (collapsing by 11% at the opening bell) and was followed by the Great Depression of the 1930s.
Like many others, I thought that this would never happen again, the world - governments and central banks - have learned from the mistakes of the past. Like many others, I was wrong. The "Great Recession of 2008" happened.
And before what happened, happened, no less than then Fed Chairman Ben Bernanke was dismissive of the signals of trouble flashing right before his eyes.
Quotes published by "Business Insider" prove this:
Jan. 18, 2008 - (Two months before Fannie Mae and Freddie Mac collapsed and were nationalised) "They will make it through the storm.'"
June 9, 2008 - "The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so."
July 20, 2008 - "The GSEs are adequately capitalised. They are in no danger of failing."
And then wham bam thank you ma'am, Lehman Bros. filed for bankruptcy on 15 September 2008, setting off a chain of events that changed the meaning of GFC from Geelong Football Club to Global Financial Crisis.
Maybe, this time is different. Then again maybe not.
The "Economic Letter" published last night by the Federal Reserve Bank of San Francisco (FRBSF) is reason to be concerned:
"The ability of the Treasury yield curve to predict future recessions has recently received a great deal of public attention. An inversion of the yield curve - when short-term interest rates are higher than long-term rates - has been a reliable predictor of recessions. The difference between ten-year and three-month Treasury rates is the most useful term spread for forecasting recessions-without any adjustment for an estimate of the underlying term premium."
Sure, we're not still there (as the FRBSF shows) but with the Fed on a rising path towards higher rates and investors flocking into long-term US Treasuries - for safety against Trump's protectionist policies, the developing emerging market crisis, and for whatever reasons - we might just get a yield curve inversion.
Thanks for reading Famous last words. Please share...!
0 Comment for "Famous last words"