Economist and president of a research firm that bears his name, Andrew Smithers (not related to the Smithers of Mr. Burns fame) is saying our on-fire stock market is set to burn itself out. The S&P 500 Index is overvalued by 40%, he believes, and we can expect a plunge thanks to central bankers restraining themselves on the securities purchases that have pushed the markets up so far so fast. Also, banks are going to need to sell more shares to raise capital and pump up their balance sheets.
If the S&P 500 were to take a 40% dive today, it would fall to 647.76 (based on the Friday close), below the low it recorded in March.
How likely is a decline? Well, Mr. Smithers claims that equity markets have been exposed based on the effects of quantitative easing – the process by which governments pump cash into an economy.
In the United States, "queasing" has resulted in asset purchases that have doubled the size of the Fed's balance sheet since the beginning of the financial crisis – and it's now at $2.1 trillion. The Bank of England has spent $286 billion in the last seven months for the same reason.
So, if Smithers is right, we could find ourselves in a disconcerting spot. Until then, all we can do is brace ourselves.