Back in May, I wrote that this bull market had room to run, but that we were approaching its final, blowout phase. We’ve gotten closer.
Already we’ve seen signs of froth, especially in the FAANG stocks (Facebook Inc. FB, Amazon.com Inc. AMZN, Apple Inc. AAPL, Netflix Inc. NFLX, and Google parent Alphabet Inc. GOOG, GOOGL, where even value investors have piled in, chasing outsize performance.
But after eight years and a more than tripling of the Dow Jones Industrial Average DJIA, it’s time to think about what could bring this bull market to a timely, or untimely, end.
1. Recession
The stock market has predicted nine of the last five recessions, Nobel Prize-winning economist Paul Samuelson once joked. A half-century later, he has turned out to be largely correct: Only seven of the 13 bear markets since World War II have led to recessions. But although not every bear market predicts a recession, every single recession has been preceded by a bear market or market correction.
So, what are the chances of a recession? Very low right now. Job growth has slowed over the past few months and GDP is growing at only 1.2%, but there aren’t the declines we usually see in recessions.
2. The Federal Reserve
As unemployment has dropped to 4.3%, the Federal Reserve has continued gradually raising interest rates. After the last Federal Open Market Committee meeting, Fed Chairwoman Janet Yellen indicated the rate-setting body was on track to raise the federal-funds rate three times in 2017 and continue on that path next year, even though inflation is well below the Fed’s 2% target rate. She also said the Fed would begin shrinking its $4.5 trillion balance sheet.
3. FAANG crash
These stocks have accounted for so much of the market’s move over the last three years that any serious dislocation in this sector could bring the whole market down with it. Their fundamentals — earnings and revenue growth — are so solid it’s hard to imagine their stocks would collapse.
4. War
As I wrote a couple of weeks ago, a war with North Korea is the markets’ biggest geopolitical black swan, because it would likely be cataclysmic, with hundreds of thousands dead, the world’s fifth-largest metro area, Seoul, suffering massive destruction, and perhaps even nuclear or chemical weapons unleashed on Japan or U.S. bases in the region.
But for some reason, the U.S. recently shot down a Syrian fighter jet, prompting warnings from Syria’s leading allies, Russia and Iran. The Trump administration might be spoiling for a fight with Iran, which has sent Revolutionary Guard and Hezbollah fighters to support tyrant Bashar al-Assad.
Source: Bloomberg
Junior Trader Stefan Panteleev
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