Tags: charles dumas | stock market | fed | rate hike

Economist Charles Dumas: Stock Market 'Vulnerable' to Rate Hike

Economist Charles Dumas: Stock Market 'Vulnerable' to Rate Hike

(Dollar Photo Club)

By    |   Tuesday, 11 October 2016 12:01 PM

 

Charles Dumas, chief economist at London-based Lombard Street Research, warns that the lofty stock market may soon be crashing back down to more realistic levels.

"When the Fed gets real and makes the necessary increases, this market could prove much more vulnerable than is traditional in the early stages of a rate-hike cycle," Dumas wrote in a recent note, CNBC reported.

"I'm not suggesting the stock market is headed for a bloodbath like in the crisis in 2008-9, but of course American rates do drive everything else in the world," Dumas said.

Corporate buybacks have become the "chief source of buying in the market," not outside investment. He fears that the 8 percent growth in nonfinancial bank debt is fast enough "to sound the alarm." He said the economy is healthy enough to withstand a rate increase but he fears the stock market isn’t prepared, CNBC said.

"And the reason this is profitable, of course, is that debt is ultra cheap at the moment, and the stocks on the other hand yield quite a bit so it makes sense even in a very short-term way," he told CNBC.


While your average savvy investor might be prompted to act upon such a warning, one of the most respected financial gurus of our time thinks the recent investor “bearishness” is actually good for stocks in the long run and the market may still hit 20,000 before year’s end.

“If you want to know the truth, I actually think the bearishness that we see on the part of not only ordinary investors but professionals is a positive for the market,” Wharton School of Business finance professor Jeremy Siegel told CNBC.

“In 1999 and 2000 people were unbelievably bullish. We reached 30 times earnings at the peak of that bull market. That's another 50% higher than we are today," he said.

But not all experts are as optimistic as Siegel, a longtime noted market bull.

For example, Seattle-based Russell Investments says American equities are priced too high with too few prospects for earnings growth to rally much more. Other reasons for caution listed in a recent report include weaker job creation and fading price momentum. The firm reiterated an underweight recommendation for U.S. stocks.

“We see the new mediocre, which is a combination of lackluster global GDP growth, weak corporate earnings and expensive U.S. equity market valuations,” Paul Eitelman, investment strategist for North America, told Bloomberg. “The net result of that is that we think medium-term expectations are likely to be subdued.”
   
(Newsmax wire services contributed to this report).



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Charles Dumas, chief economist at London-based Lombard Street Research, warns that the lofty stock market may soon be crashing back down to more realistic levels.
charles dumas, stock market, fed, rate hike
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2016-01-11
Tuesday, 11 October 2016 12:01 PM
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