The Stock Market That Could – Climbing a Wall of Worry

Does the phrase “climbing a wall of worry” sound familiar to you? In many years the stock market has continued to rise despite significant concerns in the economic or political environment. There are a lot of items causing investors to be concerned about current stock prices – inflation, shipping delays, Federal Reserve becoming less accommodative, political divisiveness, prolonged increase in stock prices and the threat of new strains of the COVID 19 virus.

Some of these concerns have caused investors to be skiddish of late. One of Warren Buffet’s famous quotes is, “Be fearful when others are greedy and greedy when others are fearful.” When there is fear in the market it means that investors are being cautious and not pouring all of their available funds into stocks. This can decrease the threat of a major decline in market prices.

Barring a “black swan event,” I think there are reasons to be optimistic. What is a “black swan event”? It is an event that investors are not expecting. The 9/11 attack was just such an event.

Although we may see some increased volatility and possibly declining stock prices over the next three to six months, I believe there are many reasons to expect higher stock prices a year or two from now.  A few of these include:

• Increasing corporate earnings. Corporations are broadly seeing rising earnings as business returns following the COVID decline.

• Low corporate debt. Nonfinancial corporate business debt as a percentage of market cap is the lowest it has been since 1945. See accompanying chart from the Federal Reserve.

• TINA (There is No Alternative). Interest rates don’t have much lower to go, which doesn’t bode well for bond prices or bank savings. Commodities have risen and real estate is at high price levels. All of this leaves very little alternatives for investment than the stock market.

• Cash Available on Sidelines. Significant cash seems to remain on the sidelines from nervous investors and those who have cashed in on other successful investments. As interest rates on savings accounts remain low and inflation starts to rise, there may not be much choice for savers other than to seek returns in the stock market.

• Infrastructure Spending. The Federal Reserve may be looking to cut back funds flowing into the economy; however, the U.S. congress is on the verge of spilling trillions of dollars into the economy in the form of infrastructure spending.