The Biggest Stock Market Fears Debunked
December 12th, 2016 | Posted in Investing
If there’s one thing that market participants lack most today, it’s confidence. A biggest issue for investors is a reluctance to believe that the market has substantial upside left. Here is a list of the most frequently mentioned fears and concerns along with analysis on each of these issues from our wealth management team.
1. The Monetary Policy Trap
In the developed world, central banks have done something that’s never been done before in history—lowered interest rates to near zero across the board. In some cases, (Europe and Japan), they’ve implemented negative interest rate policies, which essentially means that banks lose money if they keep it parked at the central bank. There are two problems with this approach. First, it doesn’t seem to be working very well as banks have seen margins get squeezed, loans go up only marginally, and economic growth and inflation are currently not showing signs of taking off. Second, what happens if another financial crisis hits soon? Central banks will have already used many of their essential tools, and they could trap themselves into a corner. I actually see this as a legitimate concern in the markets today and another reason to favor U.S. stocks since the Fed has long ended QE and should be ‘normalizing’ interest rate policy soon.
2. The Geopolitical Threat
It often feels like the world is under siege and the threat of terror is imminent. For any readers that have been directly affected by an attack, we cannot begin to empathize with your experience. For the rest of us, we would do well to take a lesson from the market when it comes to terrorism—don’t let it shake you. Apart from the September 11th attacks, there has not been a terrorist attack that has coincided with or caused a bear market. Stocks have almost always shaken off attacks within a matter of days, and even as I write here today the market continues to reach new highs, even in spite of a string of terror attacks over the last couple of years.
3. China’s Economic Hard Landing
China’s economic restructuring is underway, but the long-feared economic hard landing has yet to be felt. Non-manufacturing PMI (Purchasing Managers’ Index) has been running well over 50 for over a year. Additionally, manufacturing PMI, which was expected to feel impact of the restructuring, has recently recovered to expansionary territory over the last few months. With consumer prices rising at a healthy 1.8% clip, and GDP still over 6%, the China fears are losing steam.
4. The Bull Market is Too Old
At 90 months, this is now the second longest bull market in history. The longest was the 1990–2000 stretch, where economic growth levels were much higher than they are now. This has many investors worried that “something’s gotta give soon.” But that’s a weak reason to be bearish on stocks. Bull markets don’t have to die of old age, there has to be a confluence of negative forces occurring that few people are talking about, and that most investors are ignoring. When you have positive investor, sentiment overshadowing negative fundamentals, that’s when the bull is usually ready to break. We don’t have that now.
Bottom Line for Investors
With equity investing, there will always be fears and worries. The volatility in the market that accompanies these fears can often dupe investors into thinking the next bear market has arrived. There are dozens upon dozens of “events” that analysts claim is the end of a bull, but they end up being wrong. The concerns listed above, while relevant, are not powerful enough to drive the next bear market. Having debunked these bearish fears, the question on many of your minds is: should you increase your presence in the stock market? And if so, which sectors now offer the most promise for gain?
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