Or is the stock market broken? Can the stock market be broken? Something is clearly wrong at this point as market prices have nothing to do with earnings, which have dropped dramatically this year, running 15% lower than they were at the start of 2017 yet the market is acting as if those projections were being exceeded by 15%.
As a fundamental value investor, it's very hard for me to get behind a rally that has taken the Russell (IWM) up 18% in 9 months and all of that has come since the Russell went back to 0% in mid-August – so we're talking 18% in 45 days. Yes, there is a little sour grapes here as the Russell is one of our hedges but that's BECAUSE the run is so ridiculous – that's what makes it a good hedge (in theory).
What makes it a bad hedge is it's been up 23 of the past 28 days – an incredible run that is very close to mirroring the previous record, which was set in 1998, right before the small caps collapsed 38%, leading the rest of the market lower in a correction that was sparked by concerns over Russia's economic collapse as well as data that showed the US economy slowing.
Our biggest fear duing this rally has not been Russia but China and Japan, as both countries are 250% in debt and can't afford a misstep but, so far, they haven't had one and their economies have both shown signs of improvement this summer. Despite the turmoil in Spain and Brexit, the EU seems intact and the broad story of a Global recovery seems to be holding water – so many good reasons for the broad-market rally to continue – but that doesn't mean the Russell can't be getting ahead of itself.
Of course the big catalyst is Trump's proposed tax cut – that's what sparked an 18% gain in 90 days but is the tax cut REALLY going to happen or is yet another Republican fantasy being sold to us by an Administration that is 0/1,000 in passing legislation so far?