Is the bull market running on fumes? Warning signals mount
On this week’s video insight, I discuss how two seemingly separate developments –Jerome Powell signalling an end to quantitative tightening (QT) and surging U.S. subprime auto loan delinquencies – may together warn that the equity bull market is running on fumes. Liquidity support could soon become more targeted, banks may tighten lending, and stretched equity valuations could face pressure. Now is a prudent time for investors to rebalance: rotating profits from high-growth names into defensives, holding some cash for volatility, and perhaps exploring adding uncorrelated assets like private credit or arbitrage funds to their portfolios.
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Transcript:
Hi I am Roger Montgomery and welcome to this week’s video insight.
Today, I want to connect two threads that, on the surface, seem unrelated – one from the hallways of the U.S. Federal Reserve (the Fed), the other from the cracked asphalt of used-car lots in the U.S. Combined, I wonder if they form a single, elegant warning: the equity bull market is running on thinning fumes.
Jerome Powell, in his address to the National Association for Business Economics, back on October 14, floated a phrase that sent the algos scrambling: quantitative tightening (QT) is “coming into view” for an end. The reflexive read was more liquidity, higher multiples, party on, and lifted the S&P half a per cent before the close.
I wonder whether more sophisticated capital paused. You see, ending QT is not the same as restarting Quantitative Easing (QE). Since June 2022, the Fed has allowed $95 billion a month to roll off its balance sheet – shrinking it from $9 trillion to $6.6 trillion.
That runoff was meant to drain reserves, push private buyers to absorb Treasury supply, and tighten financial conditions in parallel with rate hikes. Yet equities have kept climbing. Why? Because the Fed never truly removed liquidity. Reverse-repo facilities, overnight lending windows, and Treasury bill purchases disguised as “technical adjustments” kept the spigot open.
But what if those back-door injections are now exhausted? Bank reserves sit at 10–11 per cent of gross domestic product (GDP) – near the Fed’s own “ample” threshold articulated by Governor Waller. Powell’s pivot, then, is not the dovish gift it might seem to be. When QT stops, some analysts expect the Treasury to flood the system with short-term bills to fund defence, artificial intelligence capital expenditure (AI capex), strategic resource acquisitions, and fiscal priorities. And if they’re right, that’s not market support. Liquidity would be more targeted, not sprayed everywhere.
And Banks, already nursing loan write-offs – like Zions Bancorp down 13 per cent in a single session recently – will hoard reserves rather than lend to leveraged corporates.
If that happens, credit availability shrinks. Earnings multiples compress. The 20-plus P/E on the S&P becomes even more difficult to sustain.
And if fiscal issuance pushes long-end yields higher while the Fed caps the front end to avoid 2019-style repo spasms, we get a steeper curve at the price of thinner risk appetite. In that case, gold’s recent surge isn’t esoteric nostalgia; it is a stress gauge.
The equity market has climbed a wall of worry for three years thanks to AI euphoria, robust earnings, liquidity camouflage. That wall is now vertical, but the Fed is pivoting from tightening to targeted support that might bypass support for the most expensive equities. And meanwhile, as recent cracks in U.S. auto loans show, consumer resilience as measured by 60-day delinquencies is deteriorating. Subprime Auto Loan Delinquencies have Soared to Record Highs. PrimaLend Capital Partners – a key player in the “buy-here-pay-here” auto financing market – filed for Chapter 11 bankruptcy protection, veteran short seller Jim Chanos says there’s “lots of red flags” at Carvana, a major online used-car retailer in the U.S., and The Bank of England’s Governor Andrew Bailey has drawn parallels to the 2008 financial crisis, citing the resurgence of “slicing and dicing” of complex loan structures in private credit markets describing the collapses of U.S companies, First Brands and Tricolor, as “canaries in the coalmine,”
Investing isn’t about ‘all in’ or all out. It’s about rebalancing regularly, looking at those assets in your portfolio that have served you very well over the last few years and reweighting or ‘shaping’ your portfolio to reflect your risk profile and ongoing needs. Rebalancing is not capitulation; it is capital preservation with optionality.’
- Rotate profits from high-beta growth into defensive cash-flow compounders – utilities and healthcare have outperformed in the past month for a reason. Small caps have started to outperform.
- Have some cash or near-cash dry powder should volatility throw up a few options, and
- Add uncorrelated private assets or arbitrage funds to your portfolio. We offer a few worth considering or asking your adviser to do so.
That’s all we have time for. I’ll see you again next week. In the meantime, follow our daily blogs or follow us on Facebook and X.
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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
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