Stock Market Top Worries May Be Justified

12/11/13 9:15AM EST

Stock Market Top Worries May Be Justified Stock Market Top Worries May Be Justified

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The stock market in the United States has performed exceptionally well through 2013. The S&P 500 has gained more than 26 percent since the year began, the Dow Jones Industrial Average is up almost 22 percent and the Nasdaq is up by a whopping 34 percent. Equities have performed well so far this year, but worries about the market reaching its top continue to pressure investors.

The biggest factor compressing returns in the US stock market is the Federal Reserve’s less than clear thinking on the QE problem. Taper talk dominated headlines, and suppressed returns, through the Summer. In September it appeared that the program would continue indefinitely. The selection of Janet Yellen as the head of the central bank appeared to confirm those suspicions. The situation doesn’t look all that clear cut heading into the Fed’s December meeting.

Stock Market Top

There are several indicators that the stock market is in a period of exuberance based on shaky reasoning. The S&P 500 has seen a rapid expansion in its average P/E ratio, while little increase has been seen in earnings across the board. Where earnings are good much of the positive comes from cost cutting rather than new investment.

US companies are smaller than they were a few years ago, and they’re making more money as a result. That may not be a sustainable way for them to continue, however. Companies need to invest if the want to thrive. That means raising costs, and compressing earnings in the short term. The market may be able to bear that change in good conditions, but it could mean a further rise in valuation.

Sentiment among regular investors is euphoric. That is a dangerous sign for the market skeptic. Institutional investors, including hedge funds and pension funds, have begun to rotate their assets out of the US stock market. The contrast between retail investors and institutional investors is another sign that the market may be getting ahead of itself. There are many things to worry about as the world heads into 2014.

Federal Reserve Pressures

The major pressure is still coming from the Federal Reserve. It appears that the Central Bank may use its power to tone down its bond-buying program before 2013 ends. The change is only likely to be a small one, but its psychological effect may be hefty. Closing the tap a little is an indication that the flow can be shut off, and that the trend is in that direction.

There are other problems for investors to consider. It is possible that another global recession will hit in 2014. China is in another phase of the largest social engineering project the world has ever seen. Those who plant themselves in opposition to Communism regularly remind people of the incompetence of government. There are many things that could go wrong in Asia.

On top of worries in China are worries about vast economic problems in just about every corner of the globe. The 2008 financial crisis left an appetite for “Where is the next crisis coming from?” theories. Investors can take their pick, but there is certainly pessimism about next year in many circles.

The market may reach a top in 2014, but there are always investors who will manage to beat the trend. Those investors are not, more often than otherwise, all that worried about the impending doom of a market top. For some investors that’s an opportunity.