Considering where stocks have come from the last six years, along with the unprecedented money creation and loose monetary policy, a market crash in 2015 is without question a reasonable possibility.
Yet, for all the reasons why stocks should experience a material breakdown, it’s still important to consider overall equity market dynamics, sentiment, and the forces (i.e. Federal Reserve) that continue to have a profound effect on certainty in capital markets.
We’re due for a market correction at any time. A full-blown crash, however, seems less probable.
Market Crash 2015: What’s Going to Prevent it?
From my perspective, there is actually a substantial amount of certainty in financial markets at this time. And at the end of the day, that’s what global capital wants—certainty. This is so it can be allocated to the best risk/reward securities.
The world knows that the interest rate cycle is soon about to change. Global capital also knows that the Federal Reserve, both through its previous actions and stated words, is keen to keep Wall Street happy to the best of its ability. If this means not rocking the boat too much, then so be it. This market can handle a half point rate increase over the next 18 months.
The cost of capital is still very reasonably priced for large corporations. There have been countless debt refinancing instances taking place as big companies maneuver ahead of a rising rate environment.
But the stock market knows that the interest rate cycle is about to change. And that in itself is certainty. It also knows that the Federal Reserve is still so desperate to create asset price inflation. It’s an environment very much still favorable for stocks.
What’s up with the Breakdown in Transportation Stocks?
No doubt, price action in transportation stocks is an important metric for the rest of the stock market.
Quite simply, I believe they’ve had their bull market breakout and are now taking a break. Even with lower fuel prices, these stocks have just had their run. (See “Stock Market Crash 2015: Is the Bull Market Over?”)
The price weakness in transportation stocks isn’t a catalyst in itself for a market crash. Rather, it’s a maturation of the bull market, in my view. Transportation stocks often move ahead of the broader market in a secular bull market.
In addition, the NASDAQ Composite is leading the S&P 500 Index and the Dow Jones Industrial Average. The NASDAQ Biotechnology Index is still pushing new highs, and the Russell 2000 Index of small-cap stocks is doing the same. These aren’t typically dynamics of a market that’s breaking down.
Still, because of where stocks have come from, without question, a 20% across-the-board correction could happen at any time. It would need a catalyst, perhaps a geopolitical event, a big derivatives trade gone bad of some sort, or unexpected shock.
Going into 2016, I still see the certainty of current (and expected) monetary policy as being an overall positive catalyst for stocks.
What the current environment is good for is reevaluation of investment risk, as well as each individual position you own. Investment risk is always something you wish you spent more time on after a major price event in capital markets.