Fisher Investments Editorial Staff

14 False Fears for 2014

By, 01/02/2014
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Like resolutions and “Auld Lang Syne,” market predictions are an annual New Year’s rite—including, inevitably, warnings on all sorts of market risks. Don’t get us wrong: Risk is omnipresent. But the ones no one talks about typically pack the most potential punch. Widely discussed risks generally lack the surprise power necessary to trigger a bear market, and often they turn out smaller or the opposite of what’s expected. In our view, most of today’s risks fall into the widely known category—they’re what we affectionately call cud, chewed over ad infinitum. Here are 14 cud-like risks likely to hog headlines this year—they might seem scary, but none should be surprising or big enough to buck the bull.

The taper! Many fear the economy will tank without quantitative easing (QE). We think the opposite: Things should get better! As detailed here, QE is a headwind. Fed bond buying flattened the yield curve, discouraging banks from lending. Ending QE would lead to a steeper yield curve, making lending more profitable, encouraging higher loan growth. With more money moving faster through the economy, growth should speed up.

De/dis-inflation. Some fret less QE means disinflation or, worse, deflation. In our view, this is backward. QE is disinflationary—the flatter yield curve caused weak broad money supply growth. Money is changing hands at the slowest rate since the Fed started tracking it in the 1950s. Once QE ends and the yield curve steepens, banks should lend, fueling higher business investment—more money changing hands faster—spurring modestly higher inflation.

Housing hiccups. Some fear rising interest rates hit housing, but we don’t envision much fallout. Interest rates have risen since Ben Bernanke hinted at slowing QE in May, but they’re still near generational lows, and demand has stayed firm. While rates may still rise a bit more, a sudden spike isn’t likely—and small changes in interest rates likely don’t outweigh all the other variables homebuyers consider. Plus, higher rates also encourage banks to lend more.

Emerging Markets taper terror! Many (wrongly) assume the Fed’s QE also propped up Emerging Markets (EM)—that it sent dollars rushing abroad in search of yield. The story holds that a taper will trigger capital flight—and EM economies will crash. However, there is little evidence QE led to capital heading to EMs. And, like in the developed world, Emerging Markets likely get a boost from QE’s end! Long-term rates in advanced and emerging markets are highly correlated—EM yield curves flattened during QE, too, and as the US yield curve steepens, EM curves likely similarly steepen, providing the category a tailwind absent the past couple years.

Banking troubles in China? Rising interbank funding costs reignited fears of a Chinese credit crunch threatening economic stability in December. But liquidity pressures are a political, not economic, issue—officials are trying to rein in unapproved lending to local governments, whose debt just clocked in at $3 trillion. Lending might slow, but a credit freeze and banking blowup are highly unlikely. China’s financial sector is state-run and closed to the outside world, and the central bank has the tools to add liquidity as needed—and every political incentive to do so.

Eurozone relapse. Will the eurozone’s “fragile” recovery fade? Recent economic data and the region’s LEIs suggest not. Growth in the 18-member bloc (welcome, Latvia) may remain choppy and uneven, but it needn’t be gangbusters to surpass dour expectations.

Gridlock! Congress’ inability to pass much legislation last year is often cited as a negative, but it also meant no sweeping legislation affecting property rights or new laws rife with unintended consequences. With 2014 an election year, it’s even more likely politicians don’t do anything radical—positive for markets. 

Debt ceiling. Remember how hitting the debt ceiling was going to cause a US default and global economic collapse last year? Get ready for more of the same noise in 2014, as the debt ceiling returns February 17 and “extraordinary measures” kick in. But just like last October and the 107 times before, Congress will almost certainly raise it again, though not before plenty of huffing and puffing in DC. (And even if they don’t, default needn’t ensue.)

Affordable Care Act mayhem. More provisions take effect this year, and some fret this will be the year the ACA finally takes down stocks. But surprises move markets. The ACA has been hashed and rehashed since before it was passed in 2010, and its surprise power is effectively nil. Were it otherwise, we would have seen a bigger market reaction during the chaotic exchange rollout or when the employer mandate was delayed.

Slow growth. Some fear slow US growth is a big risk, but evidence suggests it isn’t. For one, slow headline growth is partly tied to falling government spending. The US private sector—the main engine of growth (and what stock investors have a stake in)—is growing fine. Despite QE!

The dollar’s demise. Fear of the dollar’s demise seems to resurface annually—and we heard another round as 2013 wound down. Don’t buy into them—while the US doesn’t gain much from being the world’s reserve currency, it isn’t going anywhere. Though its market share (as a percentage of global reserves) has fallen since 2000, in dollar terms, it’s at all-time highs and rising.

IPO euphoria? IPOs resurged in 2013, prompting concerns of Tech Bubble-ish euphoria. Yet today is nothing like 2000, when IPOs hit at four times the offering price and kept on surging (until they crashed even harder). Aside from a handful of high-profile successes, most IPOs have come in near the offering price and haven’t soared in the following days, and many planned IPOs have been pulled. A few high-flyers may signal green shoots of optimism, but not euphoria.

Stock bubble. Bubble fears are self-deflating, especially when “experts” get involved (which helps fear circulate far and wide). It introduces worries, which keep sentiment in check. While the recent spate of positive economic data may have investors feeling slightly more optimistic, sentiment is far from euphoric, and stocks have plenty of (underappreciated) fundamental support.

Bullets and bombs. This is the year North Korea fires a rocket that works … Or the Middle East erupts… Or saber-rattling in the South China Sea turns hot … Or, or, or. We don’t know what any country/group/individual will do this year. But potential short-term volatility aside, conflict likely needs to be major and carry big global economic implications to derail the current bull market.  

Widely discussed risks like these do have their use—they keep expectations low, creating opportunities for reality to surprise the upside. False fears are usually bullish, giving stocks a wall of worry to climb. It seems there is a pretty big wall as 2014 commences.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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