By Professor Ricardo “Rick” Ulivi, Ph.D.
The major asset markets, except commodities, have been on an incredible upswing since early 2009. Just last week most of them set new record highs. Will anything cause then to begin falling, rather than moving higher?
Here are some possible factors.
An increase in interest rates
Although much has been said about the Federal Reserve raising rates this year, an increase of a quarter of a point is no big deal. What you have to watch out for is a change in the DIRECTION of future interest rates. Since 1980, the trend has been down. If this trend reverses, and the markets believe that the new direction, over the long term, will be the beginning of an ever increasing trend, the stock and bond markets will drop. So, watch the direction of interest rates.
A slowdown of the economy
The US has been growing for several years, but at a rate lower than the historical average. If this rate of growth slows down, it will cause the market to drop.
A financial default of a major company
If a major company declared bankruptcy because of too much debt, it could cause fear that others may go the same way. The most likely place for this to occur is in China. Keep reading the financial news regarding China.
A default by a government
Venezuela could default on their debt. Their economy is a mess, and a default on their debt would create instability. This is true of Greece, also. A default by their government would spook a lot of people. What are the consequences of this? The Germans would lose big, and so would the Greeks. Most likely, Greece would propose a restructuring of their debt similar to what Argentina offered in the early 2000s. That is, it would offer creditors 30 cents on the dollar. This means the Germans and other European governments would lose over $200 billion euros. In that case, taxpayers would be asking their politicians why they lent money to a government that was a poor credit risk in the first place.
Venezuela is another candidate for a default. Although they have incredible oil reserves, they have had unbelievable mismanagement. The government could default any moment too.
A major war breaking out
The likely place? The Middle East. ISIS is certainly looking as though they are winning their war, and the establishment of a caliphate could disrupt the Middle East even more. Keep reading about events in that part of the world.
In sum, the record prices of stocks, bonds, and real estate in the U.S. make no sense to me. I urge you to become even more conservative than you usually are.