FIVE SCENARIOS STOKING WORRY ON WALL STREET
With stock indexes in record territory and a 71⁄ 2- year bull market chugging along, investors are worried. Why should they be, you ask? The U.S. employment market is back to churning out 200,000plus jobs each month, and the real estate market is filled with willing buyers of new homes.
But risks remain in a market that is no longer cheap.
“It doesn’t take a lot to derail the market; if anything goes wrong, swings in the stock market can be pretty pronounced,” says Savita Subramanian, equity and quantitative strategist at Bank of America Merrill Lynch.
“Our call is for a 30% chance of a meaningful correction of up to 20%; it’s not our base case, but it’s a reasonable case.”
Here are five things that could derail the stock market rally:
SEPTEMBER IS A WEAK MONTH FOR STOCKS
Could vacationers return to work in September after summer holiday and face a market shock? It’s possible. September is the worst month of performance for the Dow Jones industrial average in the past 50 and 100 years, according to Bespoke Investment Group.
WHITE HOUSE RACE NARROWS
The market is assuming Democrat Hillary Clinton will win the November election. But it may be too early to count out Republican Donald Trump.
Polls vary widely. A sampling of recent surveys, which all show Clinton in the lead, puts the two candidates as few as 4 points apart and as many as 12.
If polls after Labor Day show Clinton with only a 2- or 3-point lead, “it could inject a mood of uncertainty into markets, which seemingly are convinced Trump can’t win,” says Greg Valliere, chief global strategist at Horizon Investments and respected political and policy market analyst. A Trump presidency, he says, would raise fears of a trade war with China, economic policy uncertainty and geopolitical instability.
“She’s (Clinton) still the favorite, but it’s premature to anoint her,” Valliere warns, saying investors will have to wait until after the first debate Sept. 26 before “reaching any definitive conclusions.”
OIL RALLY DOESN’T STICK
The $45 to $50 level seen in the most recent rebound rally in the oil patch might not stick, with lower prices again spooking investors. U.S.-produced crude was down nearly 2% early Wednesday to $47.20 per barrel.
“Sub-$40 per barrel oil impacts everything,” says Randy Warren, chief investment officer at Warren Financial Service. “It creates problems for frackers, hurts employment and negatively impacts the ability of energy companies to make profits.”
Some market bulls are counting on the energy sector going from a big drag on the earnings of companies in the Standard & Poor’s 500 index to a net positive in the second half of this year and next. “Oil below $40 would put that assumption into question,” Warren says.
EARLIER-THAN-EXPECTED INTEREST RATE HIKES
The Fed — based on recent comments from a handful of members — keeps saying a rate hike is coming. If Janet Yellen hints strongly of a sooner-than-expected rate increase — perhaps as early as September — during her speech Friday in Jackson Hole, Wyo., it could roil markets, as investors aren’t expecting any rate hike until at least December. A rate increase likely would boost the value of the dollar, which would hurt earnings of U.S. multinationals and pressure oil prices.
HIGH HOPES COULD DISAPPOINT
Wall Street may be too optimistic in its forecast for corporate earnings growth and overall economic growth, which could set the market up for disappointment, Subramanian says.
“We’re leery of the lofty expectations,” she says, adding the market is pricing in 14% profit growth for the S&P 500 in 2017, or double the 7% her firm is forecasting.
She also says the “hope” bar is raised too high for fiscal spending by governments around the globe to bail out markets.