I think the stock market has reached very over-bought levels. No, let me rephrase that: insanely overbought levels. Fiscal flows (federal spending) are negative year-over-here right now and are likely to remain that way until Trump is elected. Even then there are signs that his stimulus may not end up to be what investors expect. There's already talk from Sen. Mitch McConnell, R-Kent., and Rep. Paul Ryan, R-Wisc., that they want deep spending cuts to "pay" for the tax cuts. There's even a bill in the House now for deep cuts to Social Security. Tax cuts plus spending cuts equals no fiscal stimulus at all or very little. Yet the market is rallying on the expectation of a stimulus-driven boom.
The continuing resolution that Congress passed last week freezes spending at fiscal year 2016 levels with a small addition -- $9 billion -- for a military pay raise, some additional military-related spending and other items. That amount, $9 billion, equates to about $37.5 million per day of additional spending. If you tack that on to the current average daily spending total of $9.5 billion right now it's not very much of an increase at all.
Furthermore, loans and leases at commercial banks are decelerating rapidly. This is in contrast to what I expected would happen when government spending went flat or fell. I would have expected to see the private sector take on more debt to offset the income lost from that slowdown in federal spending. It hasn't happened.
Next, with oil prices rising and the dollar strong we should expect to see the trade deficit widen, and it did, in the month of October, but it's likely to widen a lot more, which means a greater subtraction from GDP. Right now 4Q GDP is forecast around 2.5%. I don't see that happening.
On top of this the Fed will raise interest rates tomorrow. Ironic. They had all year to do that when the economy was legitimately gaining strength, but they will do it tomorrow when I am pretty sure that growth is peaking.
A rate cut earlier would have given time for the markets to digest and for the additional income that comes with higher rates to filter into the economy and lend support. The fact that Fed Chair Janet Yellen will do it now will be the worst Christmas present that investors could ask for. We'll see if I'm right, but I think I will be.
I seriously think we are looking at a much higher possibility of recession now than any time in the past year ... anytime in the last several years, for that matter.
There is one potential bright spot and that is that if business investment rises as a result of the oil price rise then that could offset the flat growth in federal spending and the drag from a rising trade deficit.
However, business spending will have to rise by a lot and I am not so sure that will happen. Right now I don't see much evidence of that with inventories continuing to fall and commercial and industrial loans at commercial banks decelerating, too. Furthermore, will oil companies have the confidence to invest tens of billions when they know that the Saudis could just pull the plug on price supports again at any moment?
I think investors have gotten way ahead of themselves here. The market has a lot of risk at this juncture. I would be seriously raising cash at the moment or even taking some short position via an ETF like ProShares UltraShort S&P500 ETF (SDS) , which is the inverse S&P 500 index ETF.