Stock market indexes are at record highs, inflation is gradually abating and interest rates are expected to stay at their current level or perhaps decrease.
Significant risks remain, however, and to protect clients' assets, financial advisors should take note of them.
"The Fed is no longer the biggest risk to the economy, earnings and valuations because it has stopped raising interest rates. … Current rates are normal … zero rates was the abnormality," Edward Yardeni, president of Yardeni Research, argues in a recent interview with ThinkAdvisor.
In the interview, Yardeni discusses the risks that financial advisors should be watching, such as a potential credit crunch and geopolitical threats, plus a wild card: the presidential election.
Yardeni, whose consultancy clients include institutional portfolio managers and government policymakers, lays out three scenarios for the economy and targets highs for the S&P 500 for 2024 and the next two years.
The bull market "can continue, unless it becomes too much of a good thing," says Yardeni, previously chief investment strategist at Deutsche Bank's U.S. equities division and an economist with the Federal Reserve Bank of New York.
He is alluding to a stock melt-up (followed by a meltdown), which he discusses, as well as the sort of investor who would lead it.
Here are highlights of our conversation:
THINKADVISOR: The stock market is setting a record. So are we in a melt-up? If so, what are the implications?
EDWARD YARDENI: I don't know that we're in a melt-up just yet. That word immediately draws the conclusion that it will be followed by a meltdown.
But I view a melt-up as a great opportunity to make a lot of money as long as we get out at the top, which is always tricky because everybody gets into the irrational exuberance of the experience and forgets to get out.
And then we give back a lot, or actually lose.
What would trigger a melt-up?
It would be led by a lot of FOMO buyers. They've already missed 50% of the increase in the market since Oct. 12, 2022, the bottom of the previous bear market. A lot of investors are just sitting there in money market funds.
If they all start jumping in during the last leg of the bull market, there could be a melt-up. That could get the multiple up to levels that make the market vulnerable to a meltdown — a very intense sell-off.
But that doesn't last very long, and then the bull market resumes.
What do you make of Mr. Market's current behavior?
For now, the market buys the idea that we're going to continue to see the economy grow and inflation continue to moderate and that the Fed will either leave interest rates where they are or lower them.
Please elaborate.
I hope the Fed doesn't cut interest rates because they aren't too high for the economy to grow.
These are normal rates, bringing us back to where they were before the great financial crisis through the great virus crisis, when we had zero interest rates. That was the abnormality.
How long do you think the bull market will go on?
It can continue to keep going unless it becomes too much of a good thing, which means that my targets are going to be achieved way ahead of schedule.
What are your targets?
For the S&P 500, 5,400 by the end of this year. If we get there by next week, I'm going to start wondering whether [the market is] showing increasing signs of a melt-up.
For next year, I'm looking for 6,000, and for the year after that, 6,500.
What should financial advisors be most wary of right now to protect their clients' assets?
You're looking for risk factors that can hurt revenues, profit margins and therefore earnings. You're always looking for variables that might depress the valuation multiple.
