What Could Go Wrong? Five Ideas…
The comments below are an edited and abridged synopsis of an article by Nicholas Colas
Colas offers up a list of five negative scenarios for US/global equities. In no particular order:
1. The easiest negative argument for stocks is also the simplest: Materially higher interest rates begin to hurt equity
valuations.
2. US consumers’ spending patterns prove less predictable than consensus expectations.
3. The end of the Pandemic Peace Dividend.
4. Tech regulation/index concentrations.
5. Winning ideas may not be the right ideas in terms of index-based investing.
walks to the cliff
Summary: There’s no shortage of capital in the world, and there’s a great variety of places to put it.
Virtual currencies alone are a $2-trillion parking lot, and the recent NFT craze shows this ecosystem can still pull in fresh capital. It will likely be a record year for US IPOs, but none of them will hit the S&P 500 until 2022 at the earliest. In other words, a lot of financial assets can do well without the S&P seeing any benefit, since correlations typically remain low during the middle part of an economic recovery. In fact, capital may leave US stock indices looking for greener pastures elsewhere.
The goal was to present five reasonable bear cases and let readers decide how likely they might be. They’re all valid to some degree, and others (like US tax policy) may not be as discounted in stock prices as commonly thought. Ultimately, Colas is positive on US stocks because he believes fiscal and monetary policy plus corporate earnings leverage offsets these potential outcomes sufficiently to make the risk-reward calculus favourable.