One of the most powerful forces in the stock market is fear. It is counterintuitive, but in markets with strong fundamentals and tons of negative headlines … the market will climb higher.
It’s such a common phenomenon that Wall Street calls the action “climbing a wall of worry.”
This is exactly what is happening with this bull market.
One fear article was simply bizarre. JPMorgan’s top quantitative analyst, Marko Kolanovic, predicted that we could experience a “Great Liquidity Crisis,” which would be triggered by flash crashes and social unrest. Kolanovic noted that computerized trading strategies and electronic trading desks could exacerbate sudden and severe price drops.
I’ve discussed the contagion risk from RoboAdvisors with my readers for some time. The real risk to the stock market, though, is the fact that ETFs can trade at big discounts to net asset value (NAV) intraday during flash crashes. Then these NAV discounts can trigger buying pressure. So, as we saw in the flash crash on Aug. 24, 2015, investors can lose 35% intraday in big, liquid ETFs, and then that day’s stock prices could end up unchanged at the end of the day.
I share some of Kolanovic’s contagion trading fears, but I still think the stock market can quickly recover from price and trading anomalies.
Where Kolanovic and I greatly differ is regarding social unrest. Kolanavic stated that the internet and social media are radicalizing Americans. And if central banks don’t stabilize asset prices, we could spiral into a depression, with social tensions like those in 1968. I don’t agree, and I think the mid-term elections could show that Americans care more about economic prosperity than social unrest.
Turn $10,000 into $133,900
The reality is that the U.S. is experiencing a boom in economic prosperity and the biggest surge in GDP that I will probably witness in my lifetime. The Commerce Department recently revealed that the U.S. economy expanded at a 4.2% annual pace in the second quarter. The U.S. is now on track to post its strongest year of GDP growth since 2000.
The strength of the U.S. economy is mostly thanks to a more confident consumer. Consumer confidence rose to an 18-year high in August, as consumer spending rose 0.4% in July. If U.S. consumers continue to spend at this pace, the Atlanta Fed’s 4.6% third-quarter GDP growth forecast is very realistic.
One reason for the surge in consumer confidence is that the U.S. jobs market is booming. On Friday, the Labor Department reported that 201,000 jobs were created in August, topping economists’ consensus estimate for 192,000 jobs. Hourly wages increased by $0.10 to $27.16 per hour and are now up 2.9% in the past 12 months. The unemployment rate remained unchanged at 3.9%.
Overall, the U.S. economy remains on solid ground and U.S. consumers are relatively confident. And that’s great news for the bull market as we head into the final months of the year.
No matter how hard the headlines try to push you to the sidelines, remember this…
We are entering the seasonally strong time of year. In fact, according to the folks at Bespoke, the S&P 500 has climbed an impressive 3.31% between August 21 and November 19 in the past 10 years.
I’m expecting this bull market to continue to brush off relatively negative news and continue to climb higher in the upcoming weeks.
Sincerely,
Louis Navellier
