1.Valuations are stretched on easy money. Barring some unforeseen geopolitical shock, the Fed will likely have hiked rates 2-4 times by mid 2016 in their efforts to bring monetary policy back in line with historic norms. Valuations are lofty based on abnormally low-interest rates. A reversal of the zero interest monetary policy will create a higher hurdle for equity valuations.
2. Rising rates will be a financial headwind to profits. According to JP Morgan ,” The low-interest-rate policy has had a material impact on S&P 500 EPS, with interest expense declining from $55/share in 2007 to around $18 in recent years… Assuming rates continually rise, we expect interest expense to become a gradual headwind by 2016/2017″ . As Larry Kudlow is fond of saying, earnings are the mother’s milk of stock market values.
3. Markets loathe uncertainty. Research has shown that the stock market tends to go up during a presidential election year. The presidential cycle will be in full swing by May 2016. Polling shows an evenly divided country. There will likely be issues that make investors nervous like higher taxes or reduced government spending to combat mounting deficits. Both of these political hot points will be a drag on growth and consequently profits.
4. The bull is long in the tooth. Valuations are high by most measures and bull markets don’t last forever. This one has already lasted far longer than the average bull market. Some kind of correction is due.
5. Seasonal weakness could precipitate a turn. Sell in May and go away. Although this adage hasn’t worked for the last three years, since 1950, the Dow Jones Industrial Average has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period. If the bull market ends in 2016, May will likely be the turning point for a meaningful decline in the stock market.
All that being said, bull markets don’t end with a clarion call. We may already be in the beginning stages of the end. Insider selling has swamped buying for some time. The smart money doesn’t want much to do with the stock market.