On Wall Street, it’s often said, “Markets make opinions.” This catchy phrase captures an intriguing reality in finance. But what does it truly convey?
This adage likely means that following an extended period of rising stock prices, even the most rational minds craft elaborate narratives to justify the continuation of these favorable conditions. Accordingly, if the market experiences prolonged growth, these narratives become so entrenched that they attempt to convince everyone that stock prices will climb endlessly.
After nearly a decade of consistent gains in the stock market, fresh narratives emerge explaining why this trend will persist. One such term from the late 1990s, “Goldilocks,” is now being revived to suggest that a stable economy, characterized by slow growth and low unemployment, is highly beneficial for stocks. The belief is that if the economy maintains a balance—not too cold, yet not too hot—stocks can soar significantly.
Moreover, the current sentiment among analysts suggests that the situation is so favorable that “Goldilocks” might not be sufficient. For instance, JPMorgan’s Jan Loeys recently noted:
“We’ve dubbed this environment ‘Better than Goldilocks’ just two weeks ago.”
“With global growth breaking free from its seven-year range and inflation unexpectedly low, we’re evolving from a Goldilocks economy to an even more advantageous scenario for risk assets. While this won’t last indefinitely, it has the potential to create a positive impact on all assets, with riskier assets likely outperforming in the interim.”
Challenges, Complacency, and Dangers Ahead
While Loeys admits that stock prices won’t rise indefinitely, Jim Paulsen of the Leuthold Group offers a markedly different perspective:
“We’re experiencing a fully engaged economy with increasing real wages. We’ve revived the corporate earnings cycle, and there’s strong confidence among both consumers and businesses. The exciting part is that we can achieve all of this without spurring inflation and interest rates. If this trend continues, I believe the bull market could go on forever.”
However, the notion of “forever” is quite expansive. There’s no doubt that Paulsen’s viewpoint is shaped by the market’s long-standing success. Yet, the idea of an eternal bull market, akin to an endless summer, can be deceptive.
Jay Adams, a pioneer of pool skateboarding in the mid-1970s, once remarked that he had “been on summer vacation for 20 years.” Unfortunately, this proved to be more of a burden than a benefit. By the time he reached 40, Adams appeared exhausted, and tragically, at just 53, he passed away.
Much like an endless summer, the concept of a perpetual bull market can be misleading. If it escalates too rapidly, it risks burning out quickly. Conversely, if it advances at a sluggish pace, it may foster complacency, leading to a significant downfall.
Investors have been conditioned by years of smooth gains to feel as though they operate in a risk-free environment. Their growing complacency raises crucial questions about future market conditions.
Preparing for Market Setbacks
There are specific endeavors in life that present minimal rewards for the level of risk involved. For instance, accruing $100,000 in student loan debt for a degree in art history or provoking a biker could lead to regrettable outcomes.
This summer, investors have been disregarding risks without facing immediate consequences. As of Monday, the S&P 500 managed to avoid fluctuations greater than 0.3 percent for an unprecedented 13 consecutive days, a phenomenon not seen since 1927.
However, yesterday served as a wake-up call for investors. Heightened fears regarding a potential nuclear conflict with North Korea shattered the prevailing sense of security—although other factors might have played a role too. In any case, the S&P 500 declined by 1.45 percent, while the NASDAQ fell by 2.13 percent.
In a surprising turn of events, anxiety returned to the market for the first time since the last presidential election. Here are the details:
“The CBOE Volatility Index VIX jumped roughly 44 percent to 16.04. While this remains below its historical average of approximately 20, it highlights a growing sense of concern regarding global events. At the very least, it suggests that a stock market that has consistently reached all-time highs might be on the brink of a substantial decline.”
“Thursday’s increase in the VIX marked its highest level since November 8, when it reached 18.74, along with its sharpest single-session rise since May 17, when it surged by 46 percent according to FactSet data.”
Perhaps this recent downturn is merely a blip in the overall market’s upward trajectory. However, relying on that assumption could be risky. The potential rewards do not adequately compensate for the underlying threats. At the very least, brace yourself and be prepared for another market setback.
Sincerely,
MN Gordon
for Economic Prism
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