But investors should beware when politics start to cause investors to stampede into positions and bid up stocks that were arguably over valued before the election. Need I remind readers that over the last 8 years we had a stock market that rarely fell because the Fed kept interest rates at zero percent? Then, Europe and Japan central banks piled on with equally outrageous asset buying programs, including buying equities. But the central bank inflation which underlies stock market valuations does not seem to be top of mind to the minions who are racing into the fire in seeming support of the Trump “white knight” whose nationalist message combined with large tax cuts and infrastructure spending are going to put a “chicken in every pot”.
Don’t misread me as a Trump non-supporter. What he is about to do is long overdue, and I believe that the trade aspects of his platform must be executed in order to right the wrongs of the past 25 years. But, I do not believe the road will be as easy as the market might lead investors to believe at this point in time. I do get the positive market move based on the expectation of lower corporate taxes. It is hard to argue against a direct government subsidy to corporate cash flow. But are corporate tax cuts and an infrastructure program going to be enough short-term to keep the market at these lofty levels as the air in the stock market bubble is simultaneously released? The odds are not good on this bet as the indicators I track in the Financial Relativity Index empirically are currently indicating.
Every indicator in the model has either turned to caution or warning level as of the end of November 2016. The combined risk score of 37 in the model places the probability of a 10% or more drop in the market within the next 3 months at over 90%.
Financial Relativity Index Metric Review
Looking at the Market Risk Index, the risk recently moved to elevated status because of the current stock