{"id":7242,"date":"2018-10-08T15:12:28","date_gmt":"2018-10-08T19:12:28","guid":{"rendered":"https:\/\/www.zacksim.com\/?p=7242"},"modified":"2022-02-27T17:55:09","modified_gmt":"2022-02-27T17:55:09","slug":"3-risks-rising-stock-prices","status":"publish","type":"post","link":"https:\/\/zacksim.com\/financial-professionals-insights\/3-risks-rising-stock-prices\/","title":{"rendered":"3 Risks to Rising Stock Prices"},"content":{"rendered":"

The S&P 500 notched a stout +7.2% gain in the third quarter, in spite of bubbling trade disputes, rising interest rates, and concerns about currency and debt in the Emerging Markets. Q3 marked the S&P 500\u2019s best quarterly performance in nearly five years (Q4 2013).[1]<\/p>\n

In my view, the bullish outlook for stocks \u2013 and U.S. stocks in particular \u2013 remains the base case. But as optimism builds in the markets with rising stock prices and a strong economy, vulnerabilities also tend to become more viable, in my view.<\/p>\n

It\u2019s been my experience that big declines in the market often come just as investors fully and confidently embrace the \u2018booming\u2019 economy and the soaring stock market. It\u2019s an unfortunate reality, but just as things start to feel really good on all fronts, that\u2019s precisely the time when we should be looking over our shoulders for the bear.<\/p>\n

With that in mind, this week I want to take a look at a few risks that are circling the markets today, what I deem a \u2018triple threat\u2019 to rising stock prices.<\/p>\n

Threat #1: Rising Crude Oil Prices<\/strong><\/p>\n

Rising oil prices have just started to gain attention in the media narrative, but still remain off the radar screens of many investors. Perhaps it\u2019s time to pay a bit more attention \u2013 Brent Crude oil prices crossed into multi-year high territory last week, and traders seem to be betting that U.S. sanctions on Iran and lower output from embattled countries like Venezuela and Libya will lead to supply shortages. The question of whether Saudi Arabia can fill the supply gaps seems uncertain at best, and is perhaps the catalyst for global oil prices being up some 25% on the year[2]:<\/p>\n

\"\"<\/p>\n

Source: Federal Reserve Bank of St. Louis<\/em><\/p>\n

Meanwhile, demand has remained fairly firm as global economic growth has continued apace, in spite of the supposed negative impacts from tariffs and trade disputes. That leaves prices vulnerable to the upside, in my view, should further supply disruptions take hold.[3]<\/p>\n

Threat #2: Tightening Monetary Policy<\/strong><\/p>\n

The Federal Reserve raised interest rates in their September meeting and most market participants expect another in December. While I wouldn\u2019t necessarily refer to this tightening as fully hawkish given the Fed\u2019s gradual and smooth approach, it certainly moves in the direction of tightening financial conditions which could result in more saving, less housing activity, and perhaps a plateauing of fixed private investment on the corporate side. Taken together, these are the types of macro events that can put the brakes on fast growth.<\/p>\n

As interest rates rise, investors should pay attention to rotation trends amongst asset classes. Already, we\u2019ve seen rate-sensitive sectors like Consumer Staples and Utilities underperforming, while government bonds have done better.[4]<\/p>\n

The question at the center of tightening monetary policy is \u201cwill the Fed go too fast,\u201d which we\u2019ll have to answer almost surely in the coming year or next.<\/p>\n

Threat #3: Too Much Optimism<\/strong><\/p>\n

U.S. consumer confidence is at an 18-year high, the stock market is hovering around all-time highs, and corporate profits have been soaring all year.[5] There are plenty of reasons for optimism about the economy and equities markets.<\/p>\n

But that\u2019s also what worries me. A tell-tale sign of a frothy market, in my view, are high and rising stock prices accompanied by enthusiastic and confident investors. I like it more when the \u201cwall of worry\u201d is present in the media narrative, which is largely missing today save for tariffs.<\/p>\n

A case-in-point was made earlier this week, when University of Florida professor Jay Ritter pointed out that roughly 83% of U.S.-listed IPOs in 2018 (year-to-date) lost money in the 12 months leading up to their offering. That\u2019s higher than the 81% of unprofitable companies issuing IPOs in 2000, and is actually the highest on record going back to 1980. Investors are getting too cozy with risk, in my view. \u201cBuyer beware.\u201d[6]<\/p>\n

Bottom Line for Investors<\/strong><\/p>\n

I don\u2019t worry so much today about threats #1 and #2, because those are two stories that are fairly widely discussed and that the market (I believe) has largely priced-in already. A shock in oil prices from an unexpected supply disruption and a surge in interest rates unexpectedly would likely alter my view, but I don\u2019t see either as likely.<\/p>\n

Optimism worries me the most. Corporate earnings are strong and the economy is chugging along nicely. Valuations have also stayed in check due to some sideways movement in the market while earnings climbed. But as optimism grows alongside rising stock prices, the risk of paying too high a premium to own risk assets becomes more acute. Investors start to ignore risk because they think the economy is bulletproof and stocks are the only place to be. Optimism becomes euphoria, and as the famed investor John Templeton once said, \u201cbull markets die on euphoria.\u201d[7]<\/p>\n","protected":false},"excerpt":{"rendered":"

The S&P 500 notched a stout +7.2% gain in the third quarter, in spite of bubbling trade disputes, rising interest […]<\/p>\n","protected":false},"author":3,"featured_media":4789,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-7242","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/7242","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/comments?post=7242"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/7242\/revisions"}],"predecessor-version":[{"id":8894,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/7242\/revisions\/8894"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media?parent=7242"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/categories?post=7242"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/tags?post=7242"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}