Stocks are off to a corking start in 2013; up over 5% and at five-year highs. Naturally that has most investors wondering how and why the market will take a horribly damaging turn lower just as it did when we hit these same levels in 2000 and 2007.
If that seems overly pessimistic, you probably didn't trade through the two prior crashes. Art Hogan, managing director at Lazard Capital Markets, says everyone is looking to see what tips over the apple cart. Naturally, the most likely culprits call the Beltway home.
It's not the Fed, which has been nothing but transparent in statements during the era of Bernanke. Since the crisis began the theme has been one of aggressive, many say reckless, stimulus. Said stimulus will end, the Fed vows, when economic conditions improve. Late last year the Fed clarified that "improved" meant unemployment under 6.5%. Unless inflation rises over 2%, the quantitative easing spigots will be on full blast.
Hogan doesn't think anything will change when the Fed statement is released and not many people suggest otherwise.
However, elected officials are another matter. The last minute resolution to the fiscal cliff and pushing off the debt ceiling didn't do anything to address the problem of spending cuts.
Hogan is more worried about the upcoming sequestration -the fancy term for the $1.2 trillion in automatic spending cuts. "The government could certainly screw this up," he says, adding that 10% across the board cuts are akin to "running a budget with a sledgehammer rather than a scalpel."
If the government can avoid working overtime to prove the failings of democracy, and it's a big if, Hogan is reasonably sanguine about the market's prospects for the rest of 2013.
Back in 2000, the S&P 500 had a P/E multiple of about 22. In 2007, the multiple was 16.5. Today the S&P500 is trading at just over 13x earnings; a reasonable valuation. Hogan's not dancing on the table over how cheap stocks are, but he's not a seller either.