As the major market averages continue to set new records each day, many investors wonder what might end this bull market. Some pundits think that overinflated stock prices relative to earnings might burst the bubble, while others believe the Trump administration and political uncertainty will end the run-up. With a long list of potential dangers to end the current bull market, there are three categories that may have the biggest impact on the major market averages.
The Federal Reserve
When the Federal Reserve began quantitative easing back in 2008 to help the economy recover from the housing crisis, it was not meant to act as a standalone economic policy. The QE programs were meant to stabilize the balance sheets of institutional banks to keep the U.S. economy from collapsing.
The Fed’s QE programs accomplished this when it bought back bonds from troubled banks using money created by the Treasury. The injection of new capital inflated asset prices over the past eight years, and as the Fed starts to roll back the QE programs, it could disrupt the current inflated asset prices investors enjoy today.
Many market analysts point to company fundamentals and how they are not in line with stock prices. Some analysts point to high price-to-earnings ratios and even higher earnings-per-share that are diluting stock prices. However, other market watchers point out the rise in operating profits of large companies that make up the S&P 500 will help stabilize the major markets.
The current U.S. economy could bring down today’s bull market, according to some analysts. There are signs of weakness in the economy, including a tight labor market and stagnant wage increases. However, other analysts state that the current low-interest rate environment and strong consumer confidence shows signs of a continued improvement in the U.S. economy and poses a minimal threat to the current market averages.