Although optimism about the US economy and markets seems appropriate there are nagging horrors that cannot be discounted
Following Halloween, it is an appropriate time to discuss the 10 scariest events that could drive the stock market down a thousand points or more by next October.
I'm not predicting such a dive. In fact I'm mildly bullish for 2003 but there's plenty to be nervous about. So here is my market horrorscope. Like David Letterman, I'll list the 10 Scariest in reverse order. The scenarios that scare me most are listed last.
Here's the countdown.
10. Saddam Stalemate George W Bush, after rattling the US sabre, has retreated a bit from his hawkish rhetoric and now seems to be waiting for the UN to take the lead in crusading against the dictator.
What if we have neither war nor peace? What if the UN threatens action and Saddam Hussein just smiles? What if Bush then tries to assemble a coalition to bypass the UN and fails? The stock market doesn't take well to gnawing uncertainty.
9. Saddam Strikes Worse than a stalemate would be a war we can't seem to win. When the US and its allies fought Iraq nearly 12 years ago, there was a quick success. There's no guarantee that will happen again. What if Saddam unleashes chemical weapons? What if he attacks Israel? What if he arranges a terrorist-style attack on US soil? Any of these tragic events would rock public confidence and bring down the markets
8. Terrorism The 11 September attacks on the World Trade Center and the Pentagon were the first major incursions onto US soil by a foreign entity in close to two centuries. Another terrorist strike might have less shock value. The public's sense of vulnerability, however, would probably be greater.
7. Doped Accountants Executives at Enron Corp, WorldCom and other high-fliers of the last bull market painted false pictures of their companies' financial health. Accountants, who were supposed to be watch guards against this were asleep at the switch if not outright collaborators. Suppose another household-name company trips over trumped-up books? The stock market could get seriously sick.
6. Profit Pall Persists By this point in the bear market, many investors expect corporate profits to begin rising. It's not happening yet. Last week, Ford Motor Co. said sales were lacklustre, a prominent economist said the outlook for Christmas sales was 'bleak' and Cigna Corp and Texas Instrument, among others, offered pessimistic earnings guidance.
5. Double Dip Some economists think the US, barely out of one recession, will succumb to another. The double-dip could happen if unemployment grows and scared consumers cut spending.
4. Rates Rise Falling interest rates are like gentle spring rain for stock prices; rising rates are icy poison. The Federal Reserve cut rates 12 times last year, bringing them to a low of 1.25%, where they now linger.
The Fed might do an about-face next year, however, if the dollar weakens badly or hints of inflation emerge. With rates so low, some people feel they have nowhere to go but up.
3. Panic Presides I believe the January to August market slide chiefly reflected disgust with corporate ethics, accounting scandals and terrorism. The September decline, though, was an old-fashioned panic. Stocks fell because investors were scared the fall wouldn't stop. There's nothing like a selling bandwagon to prolong market agony. If such a spiral restarts, we could have a market crash like that of 1987.
2. Deflation Devastates Optimists, I am currently one, argue that low inflation is a big plus for the market. Pessimists say the game has changed and that we are in for years of falling prices and wages, or deflation. It happened in the 1930s. As the Depression showed, low inflation can at times be a vulture, not a dove.
1. Vulnerable Valuations This is the big one because despite the long market plunge, share prices are still high by several yardsticks.
Stocks in the S&P500, to cite one indicator, sell for 28 times earnings on average and 56 times dividends. These are ratios normally seen at the top of a bull market, not the bottom of a bear market. Previous bear markets typically continued until stocks fell to about 11 times earnings and 16 to 20 times dividends.
With that in mind, the Dow Jones Industrial Average, now at about 8,420, could hit 5,000 or less.
That's enough haunting for today. Let me summarise by saying I don't expect the market to crash. Indeed, my portfolio is optimistic. I have more long positions than shorts. (I plan to buy them later at a lower price to make my profit.)
Nevertheless, my doomsday scenarios are not just a perverse indulgence in Halloween horror. Unlike a once-a-year binge on Halloween candy, investors should always be tracking current and potential risks.
They say the stock market climbs a wall of worry, and there is plenty to worry about today
Bloomberg newsroom, Boston
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation