Home / Opinion / U.S. Stocks Topping Out Now Is Utter ‘Nonsense’ Says Top Economist

U.S. Stocks Topping Out Now Is Utter ‘Nonsense’ Says Top Economist

Last Updated September 23, 2020 1:01 PM
Kiril Nikolaev
Last Updated September 23, 2020 1:01 PM

The S&P 500 Index (SPX) has been in an unstoppable decade-long bull run and it is a few points away from the all-time high of 3,028.

However, the impressive uptrend in U.S. stocks is making some investors jittery. A market that is consistently printing fresh highs can be a cause for concern. Many believe that the steep uptrend over the last ten years is no longer sustainable.

The popular Elliottician BenjaminBlunts  thinks that the S&P 500 has already topped out:

Tweet on SPX topping out
BenjaminBlunts believes the SPX has topped out. | Source: Twitter 

BenjaminBlunts is not alone to have this sentiment. Trader Adam Mancini  also thinks that the SPX has become bearish. In a tweet, he wrote,

Bulls aren’t out of the woods just yet.

Bear scenario
Adam Mancini bear scenario for SPX. | Source: Twitter 

With the U.S.-China trade war escalating  and the U.S. housing and manufacturing indicators flashing signs of weakness, it appears that the current economic climate looks unfavorable to the bulls.

However, Alex Kruger , an economist and analyst, thinks that the fear surrounding U.S. equities is unfounded. The widely-followed analyst believes that the SPX is likely to continue humming in the next few years.

Kruger: ‘the Burden of Proof Is on Bears’

In technical analysis, the trend is your friend. In other words, if an asset is in an uptrend, it will very likely to continue the trend until it shows clear reversal signals. So far, it appears that Mr. Kruger has yet to see any bearish signals from the S&P 500 Index (SPX).

The economist exclusively spoke to CCN.com. He said:

I’d say stocks topping out now is nonsense. Stocks are in a multi-year bull market. The trend is up. The all-time high is less than a couple percentage points away. It is statistically improbable for the top to be in.

The trader added:

The question should be the opposite: why would the top be in? Bears have been wrong over and over and over again. Most bears have been bearish for years. Why are bears correct right now?

US Stocks and S&P 500 trend
The SPX has been in a strong parabolic trend since 2009. | Source: TradingView

There’s a lot of truth in Mr. Kruger’s statement. A quick search of the term “SPX Topped Out” on Twitter reveals a slew of bears getting slain since 2014.

SPX may have topped out 2014
Tweet from 2014 about SPX topping out. | Source: Twitter 

Kruger: ‘Tops Need Triggers’

In addition to technical reversal signals, a top is more likely to form if there’s a huge fundamental shift in the economy. Many say that the inversion of the US yield curve may act as a bearish catalyst.

In August, the main yield curve inverted for the first time in 12 years. On that day, U.S. stocks plummeted as fears of a recession gripped market participants.

yield curve
The yield curve inverted for the first time since 2007. | Source: MarketWatch 

Nevertheless, Alex Kruger thinks that it is not yet time to push the panic button. He said:

The US yield curve may have inverted, yet the inversion was partially driven by technical factors, partially by safe-haven flows, and partially by the Fed and the ECB (European Central Bank).

The trader added:

A curve inversion historically precedes a recession; yet the lag is considerable. Stocks usually move higher over the next 1-2 years. Furthermore, the curve has been steepening sharply since China’s friendlier stance last week. Safe-haven flows ebbed, and the deflation theme quickly started fading away.

Statistics support the economist’s statement. According to CNBC , on average, it takes 22 months for a recession to occur after a yield curve inversion. More importantly, not all inversions lead to a recession, especially when bond markets are distorted by global factors (like they are now). Thus, it appears that the investor panic last month was a false alarm.

Kruger: ‘the Fed Has Considerable Ammo to Sustain the Economy’

One crucial reason why the economist doesn’t think that a market reversal is bound to happen soon is because of the Fed and its repertoire of financial tools. According to Alex Kruger,

The Fed is the key variable. It can lower rates, and increase its balance sheet considerably.

With the Fed’s ability to keep the rally going, Mr. Kruger said the economy is likely to continue bustling for some time before a downturn kicks in. He also noted,

I think it is reasonable to be on the lookout for a top during Trump’s second term. Not just yet.

The SPX may eventually top out and the bears will finally get it right. But not just yet according to this analyst.