How in the face of such uncertainties, weakening global economic growth, political rancor, geopolitical risks, the lack of coordination and cooperation in trade, etc., is the market at an all-time high?
Let's try to answer this question:
A Favorable Supply and Demand EquationSince 1999, roughly half of the companies that are listed on the Nasdaq and NYSE are no longer public because of delistings, mergers, takeovers and bankruptcies. Of the remaining still listed companies, over 20% of the outstanding shares have been retired by corporate buybacks.
A Changing Market Structure That Favors a Bullish SetupThe popularity and explosion in ETFs combined with other passive products and strategies (e.g., risk parity) that worship at the altar of price momentum have been very market friendly. In turn, "fear of missing out" (FOMO) is triggered in a virtuous and self-fulfilling cycle as prices rise. In total, over 70% of NYSE and Nasdaq trading is derived from passive strategies. Stock-picking by active managers is slowly becoming a " thing of the past." As a consequence, "buyers buy higher and sellers sell lower."
The Fed and the World's Central Bankers Have Provided Liquidity and Have Delivered Low Interest RatesCentral bankers have forced investors into longer duration financial assets and into more risky investments. We see this in narrow credit spreads and elsewhere (in the favorable pricing of other asset classes). The liquidity provided also allows investors to rationalize higher valuations (as discount models employ the risk free rate of return in calculating intrinsic value).
Belief in the FedAs seen in Japan, all that liquidity doesn't always help -- but it's sometimes more that the relentless faith the market has in the Fed believing they can cure all ills. (Market participants forget what happened the last two times they were cutting rates.)
The Knock-On Effects From Low Interest RatesOne of the most important and favorable impact from low rates is that it encourages corporate buybacks (and substitution of equity for debt to finance it). Another market benefit is the advancement in the notion of TINA (" there is no alternative") which argues in favor of equities over low or no yielding fixed income.
Non-Economic Stock Buyers Bolster Their Share HoldingsNot only are companies large buyers of their own stock but so are central banks and sovereign wealth funds -- serving to continue to shrink available company share floats.
The Belief That a Trade Deal Is a Cure AllThough this ignores the all-time high in tension and lack of cooperation and coordination between the G7 countries (as well as the end of the Post World War II economic model/agreement), traders and investors want to believe that President Trump -- facing a closely contested November election -- will seek a resolution that will improve trade between the U.S. and China as well as with the other countries in Europe and elsewhere.
Acceptance of Manipulated non-GAAP Earnings over GAAPWhile the spread between non-GAAP and GAAP has never been as wide, analysts and strategists (for no clear reason) have adopted non-GAAP in their rationale for currently high valuations.
Large Hedge Funds Have Virtually Abandoned Short-SellingAs the hedge fund community became more concentrated, with the largest funds gaining most of the inflows of capital, many hedge funds came to the conclusion that it would grow more difficult to succeed in short-selling as the marginal impact would not be consequential. Some high-profile hedge funds simply closed their short books. This development has reduced the "supply" of stock as hedge fund short sellers have virtually disappeared.
The 'Institutionalization' of Hedge Funds
This process has made it nearly impossible for hedge funds to "pig out" or to be truly contrarian -- adding to the momentum pressure, the proliferation of "Group Stink" and the overlapping of (long) ownership of the same names.
(This commentary originally appeared on Real Money Pro on November 7. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)