The US economy is still strong and the bull market is intact. I have been pounding on the table about this for years. However, one day it will end. It is important to look at where the excesses are forming. When the credit cycle begins to end, we will see stresses forming in these areas first. Consider the 2008 bust. The housing market peaked in 2006. Signs of stress developed in early 2008. Watching the housing market during that time period was key.
Now one area we should be watching is the leveraged loan market. Over the past few years, there has been a significant rise in leveraged lending to corporates. This is primarily due to the federal reserve lowering interest rates. In this long period of low interest rates, banks are generating fees by financing leveraged corporate loans. They are packaged into CLOs (collateralized loan obligations) and sold off to generate more fees. The quality of these loans has been deteriorating over the past few years as the demand keeps rising for them.
One source of demand has been coming from pension funds. This prolonged period of low interest rates are causing pension funds to get involved in complex and leveraged synthetic financial instruments such as CLOs. The problem with these derivatives is that no one knows what is in them expect for a few geeky financial engineers. They use complex formulas that have no basis in reality to package them in an attempt to mitigate risk. The 2008 derivative blow up should have made them rethink their models.
In the meantime, as long as credit and money growth continues to grow we will have an environment bullish for US stocks. Since 2009 corporations have borrowed money dirt cheap to buy their own stocks. I do not see this ending in the near future.