By Andy Krieger, Editor, Money Trends The charade of daily stimulus discussions between House Speaker Nancy Pelosi and Treasury Secretary Steve Mnuchin continues. I am astonished by the level of optimism in the markets about a major fiscal stimulus package which is always promised but never delivered. Even when the Republicans in the Senate clearly noted their objections to a large package, the optimism persisted. At this point, I can only conclude that the frenzied stock buying is based on the hope that the optimism can carry on… even if a major stimulus package isn’t delivered anytime soon. Whatever the explanation, the market’s optimism has become almost farcical. So much so, in fact, that it’s no longer sustainable. Let me explain… Bordering on the Farcical The market valuations relative to GDP are now exploding way past the levels we had in 2000. You can see a quick snapshot of this in the chart below. 
This is not sustainable. Either the real economy needs to explode higher with fantastic levels of growth, or stocks will be exposed to heavy downside risk. In fact, equity markets will have a vicious downturn in the coming months if things don’t play out perfectly. All we need is the economic recovery to stall a bit and take longer than expected, and investor euphoria could turn to alarm, and then to dismay. And there are many risks over the coming days and weeks which could easily derail the stock market freight train and send it tumbling. Put simply, the equity market is grotesquely overvalued and highly susceptible to a negative shock. No, not all stocks, but many. The question is, where will this shock come from? It could come from unexpected delays in the race to find a Covid-19 vaccine… or from rising coronavirus cases in Europe and the U.S. It could also come from a bitterly contested presidential election after the voting is complete… in the form of more bankruptcies… or from a sharp slowdown in the economic recovery. It could even be something as simple as a continued failure by Congress to implement a significant stimulus package before the inauguration in January. That alone could easily cause a major swing in investor sentiment. Whatever the trigger, the risk is very heavily skewed lower. A Major Warning Signal Just last week, BlackRock – the world’s largest asset manager – announced that they are seeing record levels of retail buying of stocks, and the euphoric sentiment is a major warning signal. The buying, however, is not only retail. Institutions are also pouring money into the market. The fear of missing out (FOMO), coupled with near-zero interest rates and the assumed Fed put on the stock market, is fueling an historic bubble. 
The chart above shows the Nasdaq Composite. You can see that, even after the steep decline in March, tech stocks are nearing all-time highs again. To put today’s situation into context, consider this… After the low in December 2018, former Fed Chairman Alan Greenspan thought the stock market was possibly going to have one more rally. After that, he warned, “Watch out!” If you’ll recall, Greenspan called the top of the Nasdaq in the late 1990s. So investors would do well to heed his warnings. And yet, the market has more than doubled since then. And it’s over 20% above the peak highs that Greenspan thought would mark the end of a new wave of irrational exuberance. “Heads I Win, Tails I Win” Never Ends Well Against this backdrop, institutions are clearly confident they know the outcome of the election. So they’re buying. Essentially, the view is that the market will go higher no matter who wins and no matter what policies they implement – or don’t implement. Massive fiscal spending from a Democratic victory will be bullish, as it will create economic demand. The blowing out of the budget deficit is dismissed as being hardly relevant. Higher taxes are dismissed as being too small relative to the growth prospects. Higher regulation is viewed in a similar light to higher taxes. A Republican victory will continue the current bull market, as Republicans will create enough fiscal stimulus to keep things going, while keeping taxes low and regulation light. In other words, we’re seeing this “heads I win, tails I win” mentality, where investors believe the market can only go higher. And if there’s one thing I’ve learned in my 35 years in the markets, it’s that, at times like these, it pays to be cautious. My strongest advice? Manage your positions with trailing stop-loss orders. Don’t get too married to your stock positions. And don’t assume that every dip is a buying opportunity. Regards, Andy Krieger
Editor, Money Trends P.S. We’re in unprecedented territory. In my 35 years of trading, I’ve never seen a stock market as mispriced as this one. If you didn’t heed the warning I sent in February… and you’re worried about where the market is going next… watch this. | 
