The Stock Market Is At A Crossroads

The stock market is coming to the end of the second quarter earnings season, and for many companies, the impact of corporate tax reform bolstered earnings and the prospects for profits in the coming months, and perhaps years.

Stocks remain near record levels, and optimism about the future of the economy is high. As Larry Kudlow, the former CNBC contributor and head of the president's economic council says, "corporate profits are the mother's milk of the stock market." Stocks have been rallying since the global financial crisis struck in 2008. Despite a brief six week selloff at the beginning of 2016 on the back of selling in the Chinese domestics equities market, the bull market has taken almost all of the major indices to new highs.

Stocks were turbocharged by the Fed's cure for the 2008 crisis. Low interest rates and quantitative easing made bonds unattractive to investors and capital flooded into equities at an unprecedented rate. Even though the Fed began hiking rates in December 2015, stocks continued to rally. After all, even if the central bank pushes the short-term rate up twice more in 2018, it will only stand at the 2.25-2.50% level. For those of us who lived through the 1970s, 1980s, and even 1990s, a 2.5% Fed Funds rate was unthinkable. I remember purchasing my first house in the mid-1980s with a double-digit mortgage rate attached. My day told me that in the 1950s he bought our family home with a VA mortgage at 4.75%. At the time, I thought that the rate was so low it would never be available again. If markets have taught me anything over the past four decades, it is to never say never.

These days, there are not many of us around in the markets on a daily basis who remember mortgage rates in double-digit territory or a Fed Funds rate north of 5% or even 10%. Equities have a long memory and after the intoxicating effect of another great quarter fades into the market's rearview mirror, the reality of the potential for rates to keep on rising will begin to make those fixed income products look a lot sexier. Higher rates could scare the pants off of stock investors who have little or no experience with rising yields on bonds.
Source: https://seekingalpha.com

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