- The Dow Jones rally is heating up so fast it has big bulls on Wall Street worried.
- Low earnings growth and the over-confidence of investors signal that a pullback is likely.
- Top money managers expect the stock market to return to fair value in the short-term.
The Dow Jones Industrial Average (DJIA)’s longest-running bull run in U.S. history is keeping investors happy. The mega-wealthy added billions to their name in 2019 and the average 401(K)s are expanding. But, even the biggest bulls of the U.S. stock market are starting to worry that the rally is getting out of control.
When the Dow Jones rally goes on too fast, it becomes vulnerable
It is the same with both established and emerging markets; when a market begins to heat up so fast in a short period of time, it becomes vulnerable to an abrupt pullback.
On CNBC’s Trading Nation, Yardeni Research president Ed Yardeni, known for his bullish calls on the S&P 500, said that he is becoming increasingly concerned about a market melt-up.
If the Dow Jones and the rest of the U.S. stock market continue to expand at the current rate at a rapid pace, the strategist said a 10% to 20% correction is due.
The main problem with the current upwards movement of the Dow Jones is that not enough investors are cautious. Everyone is confident that the momentum of the rally will be sustained and a very few investors are worried about the market.
As CCN.com reported, the Dow Jones is considered over-valued based on its recent trend when earnings growth is considered. Financial data providers are targeting a 5% earnings growth rate in the first quarter of 2019, and it is not sufficient to support the current strength of the U.S. stock market.
Echoing Yardeni, Cresset Capital chief investment officer Jack Ablin warned investors that a 15% correction in the markets could arrive in early 2020.
Ablin, like many financial research firms, took issue with the low earnings growth in the U.S. that indicates the valuation of the stock market is inflated.
Many fund managers have said that they do not see a specific catalyst in the imminent term to take the Dow Jones further from where it is now.
The only potential variable would be a decline in the benchmark interest rate of the U.S., but the Fed has hinted that it does not intend to change the rates until 2021.
Watch Buffett’s move
Warren Buffett, the chairman of Berkshire Hathaway, still has not made a major acquisition in recent years. He submitted a bid to purchase Tech Data for $5 billion earlier this year, and he was outbid by $1 billion.
Top money managers are now anticipating the U.S. stock market to move back to fair value in the short to medium-term.
If that happens, Buffett and Berkshire Hathaway are likely to make their move, with some expecting the first deal to be made in the transportation industry.
The correction may take awhile to come
The other side of the prediction comes from an unlikely source in Nobel Laureate Robert Shiller.
Shiller, who predicted previous market crashes, said that because of President Trump and his “motivational speaking,” the rally of the stock market and the Dow Jones could last for months and even more.