Two Bloomberg charts on this year's impressive US stock market performance.#markets #investors #investing #stocks pic.twitter.com/HpymcZ2EWa
— Mohamed A. El-Erian (@elerianm) September 29, 2024
The Federal Reserve’s recent decision to cut interest rates by 50 basis points has sparked a debate about the potential for a stock market “meltup,” similar to what occurred in the 1990s. Ed Yardeni, a well-known market strategist, suggests that the current environment resembles the conditions that led to the dot-com bubble. In the 1990s, the U.S. economy experienced low inflation and strong growth, which, combined with aggressive monetary easing and technological advancements, resulted in a prolonged bull market.
Why stock market is rising in India and are we in a bubble? Nikunj Dalmia explains | Editor's Takehttps://t.co/P76iO4AmWr
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However, this surge in stock prices, particularly in the tech sector, eventually led to a bubble that burst in the early 2000s. Yardeni argues that despite an already strong economy, the recent rate cuts could stimulate an economy that does not need further boosting. This policy could push asset prices into overvaluation territory, increasing the risk of a market correction.
The million dollar question:
Between inflation, wars, elections, and the Fed, the stock market has had every reason to crash this year.
Yet, the S&P 500 is now up 21% year-to-date and has more than DOUBLED the average annual return.
How is this possible?
(a thread)
— The Kobeissi Letter (@KobeissiLetter) September 28, 2024
“Hence, we raised our subjective probability for a 1990s-style stock market meltup from 20% to 30% last week,” Yardeni said. The decision to cut rates when unemployment is low and growth is solid carries inherent risks.
Market risks and liquidity concerns
US stock market strength is truly unprecedented:
Total market cap of US stocks as a percentage global market cap is now at a record 48.8%.
The percentage has nearly DOUBLED in 15 years
The US stock market is now worth $57.4 trillion TWICE the value of US GDP.
This is also 3… pic.twitter.com/2RxR5PtXPp
— The Kobeissi Letter (@KobeissiLetter) September 27, 2024
The surge in liquidity could lead to excessive speculation, particularly in technology and growth stocks, where valuations are already stretched. Yardeni suggests that Federal Reserve Chair Jerome Powell’s decision to lower rates is likely motivated by a desire to prevent unemployment from rising significantly, especially after a period of high inflation. However, prioritizing avoiding recession risks may increase the chances of overheating the economy.
While Powell and other Fed officials argue that the current inflation outlook is benign, Yardeni expresses caution. The analysts flag the potential for higher long-term inflation and volatility as the market digests the consequences of easier monetary policy. Despite these concerns, Yardeni remains optimistic about the long-term prospects for productivity growth, which could allow the economy to grow without igniting runaway inflation.
The analysts describe a “Roaring 2020s” scenario where technological advancements drive productivity and support sustained economic growth. Nevertheless, Yardeni warns that even if this optimistic scenario unfolds, a stock market meltup could lead to a subsequent correction or even a crash. Investors should remain vigilant and consider the potential risks of the current market environment.
