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CNBC's Wilfred Frost: Rallying Stocks Due for 'Prolonged Pullback'

CNBC's Wilfred Frost: Rallying Stocks Due for 'Prolonged Pullback'

(Dollar Photo Club)

By    |   Monday, 19 December 2016 01:44 PM

CNBC’s Wilfred Frost advises savvy investors not to be tricked by the recent stock market rally because the rocket ride to new record won’t be without some tumbles back to gravity.

“Even if you are upbeat about GDP growth, that doesn't necessarily mean you should be about equity markets. Correlations between the two are not in fact that strong. By definition rising rates make other asset classes like cash and bonds more attractive relative to the recent past,” he wrote for CNBC.com.

“Plus, markets have run up sharply already – the Dow nearly doubling since 2009. Whilst it is hard to bet against the current upward momentum, a correction is due, and a more prolonged pullback is very possible too,” wrote Frost, co-anchor of CNBC’s "Worldwide Exchange."

"The single biggest factor behind the market's rise over the last decade has been central bank support. That is now either being removed, or ineffective. Even if you think yields are rising for the right reasons, to expect a totally smooth and uneventful transition is hugely optimistic," he wrote on CNBC.com.

“The ‘right reasons’ would be moderate and stable inflation caused by sustainable growth. Even in the rosiest of outlooks, where we now transition to that, I would expect there to be bumps (and we are surely at the crest of one after the recent run). But I am also dubious that a significant and sustainable uptick in growth is imminent either way,” he explained.

“Interest rates going up do not have to be a bad thing. However, the world is MORE indebted today than it was coming into the crisis 10 years ago,” he said. Yes some nations including the U.S. have cut their deficits since 2008 – but this merely slows the pace at which the national debt is increasing each year – it is still rising," he wrote.

"In that regard, rising rates are a major headwind, and begs the added question of whether Trump's proposed fiscal expansion is coming too late (something that the low unemployment rate also suggests),"" he wrote.

Other respected economic voices have also warned that the lofty stock market may take a tumble.

Veteran financial guru Larry Kudlow, who served as the Donald Trump campaign's senior economic adviser, is very optimistic that the stock market can continue its record bull run, but warns that there will be some rough patches ahead.

Kudlow told CNBC Trump has the potential to be “a very dynamic leader” by reviving economic growth with his tax-cut strategy, which in turn will restore Americans’ optimism.

Kudlow also is a leading candidate to chair the White House Council of Economic Advisers, The Wall Street Journal reported, citing people familiar with the transition.The appointment would put an establishment Republican who served in the Reagan administration in charge of shaping economic analysis in the Trump White House.

“I’m an optimist on stocks but there are going to be corrections,”said Kudlow, a Newsmax Finance Insider, radio talk-show host and CNBC senior contributor.

“There are going to be corrections. I don't want to be Pollyannic. There are going to be tough corrections,” said Kudlow — host of "The Larry Kudlow Show" and author of "JFK and the Reagan Revolution: A Secret History of American Prosperity," written with Brian Domitrovic and published by Portfolio.

The S&P 500 stock index has surged over 8 percent since the Nov. 8 election, due in large part to sectors that are expected to benefit from an inflationary policy, Reuters reported.

A correction is a reverse movement, usually negative, of at least 10% in a stock, bond, commodity or index to adjust for an overvaluation.

Big gains since last month's election mean stocks generally are more expensive relative to their earnings, a key gauge investors use to measure whether the market is overpriced, the Associated Press explained.

The S&P 500 is trading at about 19 times its earnings per share over the last 12 months, according to FactSet. That compares with its average price-earnings ratio of 15.6 over the last 15 years and is an indication that stocks are, if not expensive, no longer cheap. And that, in turn, implies lower future returns than the big gains investors have enjoyed since the Great Recession's end.


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CNBC's Wilfred Frost advises savvy investors not to be tricked by the recent stock market rally because the rocket ride to new record won't be without some tumbles back to gravity.
stock market, correction, pullback, cnbc wilfred frost
Monday, 19 December 2016 01:44 PM
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