Fresh highs for the benchmark Standard & Poor’s
500-stock index, which closed up nearly 6 points to a record
1992.37 Thursday sets up vulnerability phase for the market. The market
which has been driven higher in recent years by a mountain of cash looking for
higher returns in a low-yield world can’t go up forever. What exactly can stop
this rampaging bull? Here are five things that could go wrong:
1. A negative
“event.” It could be as simple as a bad headline that spooks
investors enough to give the bear an opening.
2. A bad reaction to
Fed rate hikes. The bigger risk is the bond market in light of the inevitable
rise in interest rates. Low borrowing costs, of course, have been credited for
the sharp rise in stock prices in the current bull market, as investors have
taken on more risk to garner fatter returns.
Short-term rates, which the Fed controls, are currently
pegged at a record low range of 0% to 0.25%. And with the Fed on track to end
its market-friendly bond-buying program in October, Wall Street is trying to
figure out if the first rate cut will occur in mid-to-late 2015, as
expected, or perhaps earlier.
3. Irrational
exuberance. The same thing that ex-Fed chief Alan Greenspan famously
warned about in a December 1996 speech — so-called “irrational exuberance” —is
also a risk.
If people think stocks are the only game in town as they
keep hitting fresh highs, it could set the market up for a fall if a sudden
downturn occurs and people get spooked and are forced to dump shares they
bought with borrowed money.
4. Overvaluation. Remember
early 2000, when the broad market was selling at like 30 times earnings and
crashed. While this market isn’t nearly as pricey, it is still trading a tad
above its historical average. And even the Fed’s Yellen earlier this summer has
said that pockets of the market are suffering from
A market that eventually gets overvalued is also a potential
bull killer.
5. A one-two punch of
bad news. One risk alone might not be enough to kill the bull. But if
a number of bad things happened simultaneously, the market could get hurt.
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