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  • Welcome to Charts That Count.

  • It's the second week of January, 2020,

  • and the US stock market is hitting an all-time high.

  • And in recent weeks and months the momentum

  • has been particularly strong.

  • All of which raises a question: if slowing

  • earnings growth, a soft industrial economy,

  • a simmering trade conflict, military conflict in the Middle

  • East, and sky-high valuations aren't

  • enough to slow down the stock market, what on earth is?

  • Here you have a five-year chart of the S&P 500.

  • And over those five years, the index is up 60 per cent.

  • That's 80 per cent if you include dividends.

  • And yet, over just the last year,

  • think of all the things that have happened.

  • Over the year as a whole, we have seen virtually

  • no earnings growth in aggregate among S&P 500 companies.

  • Over just the last four months of the year,

  • here, we have seen four consecutive months

  • of contraction in the industrial economy,

  • according to the ISM surveys of companies.

  • Here, of course, just in recent weeks,

  • we've seen conflict with Iran.

  • At the same time, though, the valuation of the stock market

  • is near its all-time peaks.

  • The cyclically adjusted price to earnings ratio

  • is a dizzying 31.

  • Let's not forget also what happened in September, when

  • money markets froze up and the Fed was forced to come

  • in and inject liquidity.

  • So there's been a tremendous rally, but not

  • that much good news.

  • And in fact, the rally, while it's been sharp,

  • has not been deep.

  • About a quarter of the stock market returns last year

  • were taken up by just five big stocks, the likes of Apple,

  • Microsoft, Facebook, Google, and so forth.

  • Now, none of this, by a long stretch,

  • amounts to a good argument for why

  • we should have a stock market crash anytime soon,

  • or even a steep decline.

  • It does, however, make you wonder

  • whether this furious rally is sustainable.

  • Now the stock market bulls have a very simple argument

  • in support of their optimism.

  • It is not only one word, it is three letters long,

  • and those are F-E-D. The bulls believe

  • as so long as the Fed keeps monetary policy loose and rates

  • low, the stock market will continue to go up.

  • Well, maybe.

  • And in fact, following the Fed, over not only the last five

  • years but over the last decade, has been a great plan.

  • A word of warning though, historically, there

  • is not a clear relationship between low rates and stock

  • valuations.

  • In fact, the relationship has been all over the place.

  • The stock market looks strong.

  • The economy, in some respects, such as the consumer area,

  • remains robust.

  • The Fed is, in fact, powerful.

  • It is not, however, all powerful.

  • Happy 2020.

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