Risk Still Exists
Published On: January 29, 2020
Written by: Ben Atwater and Matt Malick
With 2019 behind us, and 2020 beginning, we are writing a series about markets and the economy.
Throughout the series, we have explored the present bull market, which commenced on March 9, 2009. Our essays to date have addressed the strong labor market and solid consumer confidence, benign inflation and low interest rates, unprecedented late cycle government stimulus and what’s been interesting, even unique, about this bull market.
Today, we finish the series with an examination of what might go wrong to end this great bull market. One of the realities of markets is that nobody has ever consistently predicted them. Markets are largely unknowable. In other words, we have no idea why or when the bull market will end.
Rather, the set-up in this article is to help us remember the fragility of markets and the economy. Things have been very good, so we tend to forget they can go south quickly.
First, let’s acknowledge that any of the positive things we’ve analyzed in this series can turn to negatives and potentially upend the bull market. These include the following risks: peak employment, slowing U.S. consumer, higher inflation or interest rates, curtailed government spending or higher taxes, the end of quantitative easing, loss of technology stock leadership or overconfidence. Obviously, the biggest risk generally is that the U.S. economy falls into recession.
Of course, other risks exist as well. Coronavirus, is a great example of something that nobody heard of two weeks ago, but has the potential to disrupt the worldwide economy. Like Ebola, SARS and Avian Flu it’s unlikely to derail things, but possible. So are any number of scenarios we haven’t envisioned.
The backdrop for the market is that it has been virtually perfect and therefore investors have richly valued stocks. Although valuation in and of itself is rarely the cause of a bear market, high valuation does set the stage for meaningful bear markets when circumstances, events or narratives change in meaningful ways.
To read the previous essays in the series please visit our blog.
Markets are totally unpredictable. All the same, risks (valuations) and opportunity (momentum) currently exist. The only way to effectively balance the dichotomy is to employ a disciplined investment strategy over long periods of time. This includes investing based on your goals, rather than investing based on market forecasts, political leanings or animal spirits. Through all market cycles we will continue to work hard to keep your goals at the forefront of your investment strategy.