Top 5 Reasons the Stock Market Might Retreat

But that doesn’t mean that someone’s opinion will become your reality

It’s a debate raging across the country that seemingly everyone has an opinion about. From Main Street to Wall Street, everyone wants to know: will the U.S. stock markets retreat in 2021 or keep charging higher?

Let’s examine the Top 5 reasons the U.S. stock markets are likely to retreat between now and the end of the year.

Reason #1: Rising Rates

Historically, rising rates have not been great for stocks. Because rising rates add to the interest on debt, including business loans and corporate bonds, which makes it harder for businesses to borrow money for growth.

Here is another way to look at it: with rates so low, investors earned very little interest owning Treasuries, for example. That made owning stocks more attractive. But when rates rise, interest in Treasuries (not just buying interest) grows. And the 10-year Treasury yield has more than doubled in the past year.

Reason #2: Valuations are Too High

The price-to-earnings ratio (P/E ratio) is one metric for valuing a company as it measures a company’s current share price relative to its per-share earnings.  P/E ratios can be used by investors to compare the relative value of one company’s shares versus another company’s shares.

Well, according to research firm FactSet, the forward 12-month P/E ratio is 22.5x, which is above the five-year average and above the 10-year average.

Reason #3: The U.S. Government is Spending Too Much Money

No matter your political leaning, you can’t argue that the U.S. Government has spent a lot of money combatting the havoc wreaked by the coronavirus. Whether the $6+ trillion is too much or too little, however, can be (and is) hotly debated.

And with additional spending by the U.S. Government (infrastructure and more stimulus proposals) being discussed now, proponents want to increase the corporate tax rate from 21% to 28% and impose higher taxes on multinational companies. Higher corporate taxes will put a damper on corporate earnings, which in turn can push stock prices lower.

Reason #4: Consumer Spending is Waning

Consumer spending – which accounts for about 2/3 of our GDP – has declined in 3 of the last 4 months. Yes, it rose in January – when stimulus checks were received. 

But look at this trend:

Reason #5: Buffett Indicator Says So

About 20 years ago, Warren Buffett – the legendary Oracle of Omaha – touted his Buffett Indicator and described it as "probably the best single measure of where valuations stand at any given moment."

The Buffett Indicator is simple enough: it takes the combined market capitalizations of publicly traded stocks worldwide and divides it by global gross domestic product. A reading of 100% or more suggests the global stock market is overvalued relative to the world economy.

Well, right now, the Buffett Indicator has surged to an all-time high, as it passed 195%. For perspective, the previous record was 121% during the dot-com bubble.

What Should You Do?

Make sure your financial plan is up to date and your investments are consistent with your time horizon and your tolerance for risk.

Your financial advisor can help.