Registered Investment Adviser Caleb Lawrence
The major averages struggled to build on their previous gains as debate over tax cuts and healthcare reforms takes center stage ahead of the Fed’s looming budget crisis. With harshly worded rhetoric increasingly becoming the norm Korean saber rattling continues as the beginnings of protectionist trade practices gain popularity alienating our neighbors and trading partners alike.
Through 2016 the Fed’s official deficit hit 20 trillion while the Balance Sheet reached 4.5 trillion, and yet we struggled to maintain 2% economic growth in the post bust period since 2008 despite reflating the real estate and equity asset bubbles in the process. Along comes legendary investor Paul Tudor Jones who warns very publicly late last week that the Fed chairwoman Janet Yellen should be very afraid of market valuations and conditions including a record 528 billion in margin debt as of February 2017. She very publicly comes back and says the Fed is not afraid. Monday and Tuesday feature epic market melt ups on basically no news.
With stocks banging new record high after new record high and the bond markets recovering much of the post-election and interest rate hike losses one of these markets is going to come down hard on the wrong side of history. Absent a substantial corporate tax cut, that doesn’t seem politically likely, to keep the equity party going the data overwhelmingly aligns with the bond markets. Should sentiment break it could get ugly for grossly overvalued and heavily leveraged stocks very quickly.