EC Qualifying And Quantifying Current Equity Market Risks

Given the fact that the bull market in equities has now extended 9 years since the March-2009 low and that the seasonally ominous month of October is arriving soon, I thought now might be appropriate to quantify (technical) and qualify (fundamental) some of the risks confronting the market. Below is a monthly chart of the SP-500 December-2017 futures contract to provide perspective.

Click to enlarge

Technical Risks

To be clear, the technical condition of the market is extremely bullish and this week marked another significant breakout above resistance. Year-to-date, the SP-500 cash market has advanced @ +11.5% and more than +274% from its March-2009 low. We have yet to experience any significant declines, but trees don’t grow to the sky, especially without pruning. For the sake of risk assessment, let’s consider a hypothetical bearish Fibonacci retracement of the trough to peak market performance for the equity benchmark index (see chart above for reference). Below is a “napkin-math” table analysis quantifying risks at various levels. (Anything beyond 61.8% would have more of a secular vs cyclical overtone, a shift I do not anticipate, and therefore limited pessimism stop there.)

Retracement Price Risk P/E* Earnings Yld* F-PE** F-Earnings Yld**
0% $2496.25 0% 24.89 4.02% 17.66 5.66%
23.6% $2064.25 -17.3% 20.58 4.86% 14.60 6.84%
38.2% $1797 -28% 17.92 5.59% 12.71 7.86%
50% $1581 -36.7% 15.76 6.34% 11.19 8.93%
61.8% $1365 -54.7% 13.61 7.34% 9.66 10.35%

*Based on GAAP Earnings @ $100.29 as reported by Barron’s online

**Based on Forward earnings projections @ $141.33 provided by Yardeni Research

Fundamental Risks

It is often said that bull markets climb walls of worry and this bull has certainly not disappointed as it has demonstrated resiliency on many levels. Some of the current risks overhanging on this market are as follows:

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Moon Kil Woong 2 years ago Contributor's comment

Yes dollar weakness is the main concern. However, it is good for the US stock market until it clearly isn't. I suppose that's the main reason the dollar is being pushed into the red.