It may not get much attention right now, but the biggest threat to stock prices is also the same thing that has been supporting them for years. If you really consider what has driven the extraordinary rise in stocks, it is the fact that bond yields have been so outrageously low since the Crisis. This has created the widely-covered “TINA” (there is no alternative) syndrome that has driven investors to pour capital into stocks. Accordingly, many analysts say the biggest risk to stocks is a pickup in inflation, which would likely send bond yields sharply higher.
FINSUM: This is a solid argument theoretically, but calling a rise in inflation has been a very poor bet for over a decade. Why is that different now?
At this point it might seem natural to think that the stock market simply rises a bit everyday. Stocks have been so steady and so quiet for so long that it is almost disconcerting. The current “quiet” streak is one of the longest ever. The current number of days without a 1% move is the sixth longest streak since 1969 and the third longest since 1995. One analyst described the situation this way, saying “Right now it’s very, very tough to fight this trend … There’s a reinvigoration in the idea that we will see better growth”.
FINSUM: The huge rise in stocks from the Crisis through the last decade was generally characterized by steadiness. We don’t see this as any surprise.
The election may still be ten months away, but the whole year is likely to be framed by it, markets being no exception. With that in mind, Morgan Stanley has some advice for investors. The first thought they offer is that in this case, being reactive is probably better than being proactive. If you reflect on 2016, everyone thought that a Trump victory would hurt stocks. The exact opposite happened. In this case, don’t assume a Democrat victory would be bad. Accordingly, it may be wise to wait until the election and then allocate as seems fit at that time. The other thing to bear in mind is that a Democratic sweep could be surprisingly good for stocks. According to Morgan Stanley, ““We would expect that a Democratic sweep in 2020 could deliver the greatest impulse to the economy” because of its greater odds of bringing a fiscal stimulus than when the government is divided between parties.
FINSUM: We really like this line of reasoning from MS.
Investors are currently afraid of the turmoil in the Middle East. The US killing of Iran’s military leader has greatly stoked tensions, and markets are worried about a war breaking out in the Middle East. Since there have been many geopolitical issues in the region in recent history, there are a lot of examples of how markets have reacted. Suntrust bank analysts summarize how the market usually reacts, saying “While it is not unusual to see short-term weakness, these geopolitical events tend to have a transitory market impact … For example, when looking at a sample of geopolitical/military events, the S&P 500 was higher 12 months later in nine of the 12 events we reviewed. The three instances where stocks were down a year later coincided with a recession”.
FINSUM: If a full on war does not happen, we expect the effects will be transitory. The other non-military issue that could cause a problem is a big supply shortage in oil.
If your natural instinct is to worry about a looming recession, you are not alone. Logic dictates that with the economy and bull market having been rolling for so long, a downturn is inevitably around the corner. However, the chief economist at Deutsche Bank is making the exact opposite argument. Torsten Slok contends that the economic expansion will likely go on for “many more years”. His explanation: “The lack of willingness to spend on consumer durables and corporate capex is also the reason why this expansion has been so weak … And it is also the reason why this expansion could continue for many more years; we are simply less vulnerable to shocks in 2020 because there are few imbalances in the economy”.
FINSUM: We don’t dislike this view, but in our opinion the artificially low interest rates maintained by the Fed have much more to do with the length of this recovery (and its future prospects), than financial conservatism amongst businesses and consumers.