Prominent Permabull Says Correction Not Over Yet, Expect “Final Capitulation”

This is source I found from another site, main source you can find in last paragraph

Despite the weak jobs report last week, the U.S. unemployment rate remains poised to fall below 5 percent within months. Consequently, even modest economic growth can now produce wage and price pressures, mandate higher interest rates, lower both stock and bond valuations and force Wall Street to finally wave goodbye to its great liquidity friend. Simply reviving Chinese economic growth or bottoming commodity prices may not end this stock market swoon. Today’s turbulence is more about correcting market vulnerabilities built up over the past six years, and finding a new foundation that will allow this bull market to resume as the U.S. economy moves toward full employment.

In our view, the stock market faces four major challenges.

First, in recent years investors have become more calm and confident than at any time in this recovery. Undoubtedly, investor confidence has cracked a bit during this correction. Some quantitative measures of investor sentiment now suggest bearishness (a positive for the stock market).

However, while debatable, our current qualitative assessment of investor mindsets is that they remain fairly constructive about the future. Most media stories are not preaching the end of the world and most Wall Street strategists have maintained bullish year end targets. Moreover, financial market action is not consistent with real fear. There has been no huge and sustained rush to the safe haven U.S. treasury, U.S. dollar or gold. Finally, cyclical stock sectors have done as well or better than traditional defensive sectors in the last couple months. Industrials, consumer discretionary and emerging market stocks have been outperforming in the last couple months. Since its start, the premise behind this bull market has been “climbing a perpetual wall of worry”. Today, though, rather than  a risk, most seem to perceive the current correction more as a buying opportunity in an ongoing bull market. Once this correction finds its final bottom, we suspect many more investors will likely fear a full-fledged bear market and a heightened risk of recession.

Second, at its recent peak, the trailing price-earnings multiple on the U.S. stock market reached almost 19 times earnings and is still about 17.6 times today. Trading at 19 times earnings in a recovery with a zero interest rate, low and stable inflation and no cost-push pressures is not problematic. However, the stock market is likely to go searching for better valuation support if the normal tensions associated with a recovery nearing full employment begin pressuring the financial markets.

Third, after six years, the U.S. earnings recovery is showing signs of aging. Profit margins are near all time record highs  and compared to the last few years, earnings are likely to grow much more slowly during the balance of this recovery. Since profit margins cannot rise much higher, should sales  growth remain tepid so will earnings results. Alternatively, should sales growth accelerate, pressures on profit margins are likely to intensify nullifying much of the positive impact of stronger economic growth and keeping earnings performance tepid.

Finally, whether it is this year yet or in 2016, the U.S. is imminently headed toward an interest rate reset. Does the current relatively high price-earnings multiple, an investment community which mostly perceives the correction as a great buying opportunity, a recovery with amazingly weak productivity and an aging corporate earnings cycle represent a good foundation for stocks to withstand a rate hike?

This is source I found from another site, main source you can find in last paragraph

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