The SPDR S&P 500 ETF Trust SPY once again traded higher to new all-time highs on Thursday as optimism surrounding a sharp economic rebound in 2021 continues to grow.
At first glance, the vaccine rollout, unprecedented government stimulus and the possibility of pent-up economic demand suggests the S&P 500 bull market could have a long runway ahead. However, there are no sure things on Wall Street, and DataTrek Research co-founder Nicholas Colas says investors always need to be prepared for a market downturn.
Colas is bullish on U.S. equities, even with the S&P 500 up more than 82% from March 2020 lows. However, he listed five things that could derail the stock market rally in the next two years.
- Interest rates rise. Colas said the most likely reason the rally would run out of steam is also the simplest: If interest rates start to rise, higher discount rates will “absolutely hurt” stock valuations.
“Higher rates will come because of higher inflation and, while there’s good arguments on both sides of the ‘low vs. high’ debate, in the end ‘higher inflation/rates’ is a very real possibility,” Colas said.
- Consumer spending underperforms. Colas said there are key differences between today and the so-called “roaring 20s” of the 20th century. There was virtually no consumer debt in 1920, and assumptions that Americans will come out of the pandemic eager to borrow and spend more money than ever may not prove true.
- The world suffers a geopolitical shock. Prior to 2020, there were plenty of global geopolitical tensions, particularly between the U.S. and China. The pandemic forced people and nations (particularly their militaries) into isolation for most of 2020, and political aspirations were generally focused on the health crisis. Now that the world is getting back to normal, Colas said the risk of large-scale military action is much higher.
- Regulators crack down on tech companies. Large-cap tech companies plus Amazon.com, Inc. AMZN, Facebook, Inc. FB, Alphabet, Inc. GOOG GOOGL and Tesla Inc TSLA represent 38% of the total weighting of the S&P 500. If global regulators start to crack down on these companies for antitrust violations, data collection and management or other regulatory issues, a sharp pullback in just a handful of tech mega-cap stocks could completely derail the overall market.
- Money keeps flowing into alternative investments. Colas said the success of Bitcoin BTC/USD, non-fungible tokens and other cryptocurrencies may continue to lure investors away from S&P 500 index funds in coming years. At the same time, Coinbase and the flood of other disruptive tech IPOs and SPACs that are hitting the market this year won’t have the opportunity to join the S&P 500 until at least 2022.
Benzinga’s Take: Ultimately, Colas said the risk created by these five factors does not outweigh the possible reward of staying long the S&P 500 given the current climate of accommodative monetary policy and potential pent-up demand.
It's always a good idea for investors to be prepared for the worst and be on the lookout for any warning signs that the null market is hitting a roadblock.
© 2022 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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