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S&P 500 sure to make an all-time high next week but a correction then looks almost inevitable

Posted on 10 March 2013 with no comments from readers

With less than one per cent to go until the S&P 500 stock index hits an all-time high it is hardly a bold forecast to say that it will get there early next week. The S&P is up 8.8 per cent this year, lagging the Dow Jones on 9.9 per cent which has already taken out its all-time high.

There is likely enough momentum left in the market to take it a touch higher. Non-farm payrolls added 236,000 jobs last month, ahead of expectations while bank stress tests showed the biggest US banks would not fail in another financial crisis. Total US industrial orders slumped five per cent last month, however, and that is not good down the pike.

Growth?

Have financial markets gotten a little carried away with themselves? After all the US economy only grew by 0.1 per cent in Q4 and Bloomberg data shows it averaged just 0.6 per cent GDP growth for the past four years. A rip-roaring recovery we simply do not have.

Indeed the prestigious Economic Cycle Research Institute says the US is already back in recession (click here) and top business cycle expert Charles Nenner has the cycle starting to turn down right now (click here). Profit margins are unsustainable in the US and will fall from here, and it is the discounted cash flow from profits that values stocks.

The S&P looks way ahead of economic reality and therefore highly vulnerable to a correction. Last year it lost 10 per cent from April highs to mid-June. Giving back at least this year’s market gains would set the markets up for a shoot higher later in the year, or a further shift downwards if the economy turned south.

The bad news does not necessaily have to be made in the USA. China’s retail sales and industrial output had their weakest combined start to a year since the global recession in 2009.

Mamma mia!

The Italian election result still risks triggering another round of the eurozone sovereign debt crisis. The pound sterling looks vulnerable to a run by speculators, so does the Japanese yen. A stronger dollar is not usually good for US stock markets.

Any faltering of nerve by the global central bankers whose money printing has moved stock markets higher despite the almost non-existent economic recovery in most markets will be fatal.

By their very nature stock markets fall when investor confidence is highest. It’s running high now, indeed close to an all-time high.

Posted on 10 March 2013 Categories: Banking & Finance, Bond Markets, Global Economics, Investment Gurus, US Dollar, US Stocks

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