Investing
10 Things That Could Wreck the Bull Market in Stocks in 2018
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As the end of 2017 turns into 2018, it’s no secret that we are in the midst of one of the greatest bull markets of a lifetime. The bull market is also now nearing nine years old and the S&P 500 has rallied 300% from the March 2009 panic-selling lows. And the gains continued into 2017 despite the numerous fears at the end of 2016. The year-to-date gains (with dividends included) have been 25% for the Dow Jones Industrial Average and almost 20% for the S&P 500.
It is important to understand and to admit that all bull markets, no matter how fun and personal they are at the time, eventually come to an end. What causes the end of a bull market tends to vary over time. Is it finally time to consider the old adage that “nothing lasts forever” for the bull market as we enter 2018?
24/7 Wall St. has decided to take a look at 10 things that could derail the bull market in 2018. Before considering this as a prediction, note that the current view is that stocks are still more likely to rise than fall in 2018. In fact, many strategists are now predicting another 8% to 10% upside for stocks in 2018.
It is also important to understand that a bull market does not always die rapidly and in one move. And there is no automatic bubble just because prices have risen so much. There are still risks, some serious, that investors have to consider.
Will the Federal Reserve and interest rates get in the way of the economy and stocks? Will investors lose confidence, or could the currency markets throw a wrench into the machine? Washington, D.C., remains a risk as well, as does the ongoing geopolitical climate. Other issues have to be considered as well. We did not even address overvaluations, but the S&P 500 Index is currently valued at about 18.4 times expected 2018 earnings per share, and many of the top stocks are up over 50%.
Here are 10 things that could wreck the current bull market in stocks in 2018.
1. Rising Interest Rates and the Federal Reserve
The Federal Reserve already has raised interest rates, and it’s no secret that the Fed also will trim that massive $4.5 trillion balance sheet. It is also well known that the Fed by and large wants to raise interest rates further in 2018. What if they overdo it? The 10-year Treasury is what we use a benchmark for “stocks versus bonds” in yields, and the 10-year yield was bumping up against 2.50% again at the end of 2017. That yield can go higher, but if the yield rises above 3% to, say, 3.2% to 3.4%, then there is now serious competition for stocks in a bond yields versus stock risks analysis.
As of the end of 2017, the median Dow dividend was just under 2.2%. If the Fed raises rates too aggressively and keeps a hawkish fear in the market, equity investors may start to worry about high valuations after huge gains and just take the easy “government guarantee trade.” The Federal Reserve has ended bull markets by raising rates too high before, and it could do so again.
2. Declining Confidence
Confidence in general is tricky. There is a saying that bull markets crawl a wall of worry. But in 2017 confidence hit decade-plus highs. Some of that confidence was from stock market growth, and some is from a much more pro-business climate. And other confidence was because jobs were plentiful and pay was looking up.
After peaking in November, consumer confidence declined in December and a big drop was seen in the expectations for the coming six months. A similar drop in expectations was seen in the consumer sentiment reading in December. Consumer confidence and sentiment are always risks, but what about the recent continued drop in global institutional investor confidence? Maybe all those hedge fund and mutual fund managers and those investment advisors being cautious should get more attention than it did.
3. A Stronger Than Expected Dollar
Currencies always offer risk for the stock market. After all, it becomes harder for U.S. companies to export goods and sell services in dollars to foreign buyers if they are having to pay more and more in their own local currency terms. And currencies follow strong economies and interest rates. If the U.S. gross domestic product can get and remain above 3%, it may keep foreign buyers and central banks more interested in owning dollars.
And if the Fed remains more committed to raising interest rates than other central banks, those same foreign buyers are likely to chase the almighty dollar higher if they can earn higher interest on deposits here. Most strategists are not calling for a major move up in the dollar, but that doesn’t mean they are automatically correct.
24/7 Wall St.4. Washington Gridlock Around Mid-Term Elections
If there is one way to bring up your blood pressure, targeting politics is probably an easy way. Much of the bull market continuation in 2017 was due to lower regulations, the promise of tax reform and a pro-business attitude that frankly just wasn’t as present since the Great Recession. But now we have mid-term elections coming in 2018, and that throws the balance of power up for grabs afterward.
What if the ability to get any new laws passed suddenly dries up? What if all the lower regulatory efforts and pro-business efforts all get crammed into 2018 as an “as good as it gets” year? If the stock market is truly a discounting mechanism that tries to price in events for a few months to a year ahead, then this would be a real and serious risk for 2018.
5. M&A Roadblocks
The stock market loves mergers. After all, this is intended to make stronger companies and to reward shareholders. But despite the pro-business climate of the current administration, there has been some serious slowing of what sort of mergers will really be allowed in the future. There have been over $1 trillion worth of mergers and acquisitions that have been or could be at risk. They did not even allow Staples to acquire Office Depot, and even the outright acquisition of Rite Aid was blocked. Now we have pending mergers of AT&T and Time Warner, Qualcomm and Broadcom, CVS and Aetna, and whole slew of potential mergers that are under review or that could easily face scrutiny.
6. Increased Volatility … Finally?
It’s pretty boring to talk about the Volatility Index, but the market’s raging bull characteristics and a lack of sell-offs has sent the so-called VIX down to extremely low levels. The VIX has even been close to 10 (and been under 10) for weeks. Any January selling pressure could rekindle that volatility, and rising volatility means less certainty for investors and traders. A rise back to 15 would not be out of the question, but what happens when you get closer to 20 again? Theoretically it has to get back up there at some time.
Extreme VIX spikes higher have historically represented great buying opportunities, but they are scary and the average retail investors often get spooked out of the market during panics rather than using them as a chance to buy stocks on the cheap.
7. Geopolitics
We already know that Washington, D.C., is a risk, but it’s a big world and there are many facets to geopolitical risks. Any one of the risks would spook the stock market. There is the ongoing probe over Russian meddling in U.S. elections. There are constant headlines still talking about a Trump impeachment. The threat of North Korea building nuclear weapons, the threat of Iran being back in the hot seat, Middle East turmoil, ISIS and terrorism can create a serious shock.
The reality is that geopolitics is always considered “tail-risk” in the markets, and it makes sense. That being said, these are the same risks over and over, and when they are not, you can just remove one name and insert the other risk flavor of the day.
8. Hacks and Glitches
There has not really been that much concern about a stock market hack, but there are always some trading glitches. With the rise of roboadvisors, algorithm and machine trading, and the dominance of exchange traded funds (ETFs), there could be all sorts of cascading worries. The market has trading curbs and speed bumps to trigger halts and the like, but it is very possible that if the public decides it wants out of the market all in a short time, then it would create one major bumpy ride.
And on the hack front, an argument can be made that the rising price of bitcoin and cryptocurrencies is partially fueled by buyers acquiring faceless currency if they get hacked. Some of us still worry that management of a major bank could wake up only to find that some (or many) of their accounts have been hacked and the cash is just gone one day. These remain tail risks, but they are risks.
9. Competition from Foreign Stocks and Other Markets
In the “it’s a big world” theme, there are many stock markets to choose from outside of the United States. If the U.S. growth does not live up to its hype, then the lower valuations in Europe may compete for that investing money. And what about emerging markets? Brazil is finally seeming to be of interest again, and Russia could be back. Higher oil could fuel some of the oil-rich nations again. And India looks like it will have the best growth of any large nation in 2018.
If investors’ money chases returns, they don’t just chase those returns in U.S. stocks and bonds. What if the interest in bitcoin or other cryptocurrencies remains strong? Any of these could act as a large areas for investors to redirect or reallocate into other non-U.S. markets.
10. Buyer Exhaustion in Stocks, Particularly in the Top Stocks
It is one thing to have an exhausted stock market. This is when technicians will call a blow-off top, a pattern of a huge spike up followed by huge selling pressure. But in a more sensible move, what if investors just decide that the market’s darlings need to take a breather. Of the most popular large-cap and widely held stocks with big gains, here is how much they are up in 2017:
- AbbVie, 56%
- Alphabet, 33%
- Amazon.com, 57%
- Apple, 47%
- Bank of America, 35%
- Boeing, 89%
- Caterpillar, 70%
- Facebook, 54%
- Home Depot, 42%
- McDonald’s, 42%
- Micron Technology, 93%
- Microsoft, 38%
- Netflix, 50%
- NVIDIA, 84%
- UnitedHealth, 38%
- Walmart, 44%
This is not even 20 stocks, but the combined market value of these alone is roughly $5 trillion. It wouldn’t take very much selling in the top names to suck some serious dollars out of the largest stocks in the major indexes, and that might create a cascade of selling in other stocks if investors do not see it at as a rotational move.
As you can see, these are 10 serious risks. Sadly, there are many others, but these are the top risks as they stand right now at this stage of the bull market.
24/7 Wall St.
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