The Tip of the Iceberg in Geopolitical Risk Includes:
Argentina government debt default
War between Israel and Hamas
Growing Isis militant strength across the Middle East
Asia and the heavily disputed South China Sea
China's shadow banking system and slowdown in growth
Russia and the Ukraine (sanctions could affect the European economy)
The United States economy continues to improve and while their incredible level of debt should be a serious concern to stock market investors, it is over-shadowed by other serious problems around the world. These high levels of International country risk make the U.S. "appear" to be a safe-haven for international investment - The Lesser of Evils.
We are not seeing a specific "sector" bubble in the U.S. but an overall "equities" bubble.
By comparison, Canada's TSX is doing moderately well but the resource heavy TSX Venture is in its fourth year of dismal gains and consistent losses. The charts below reflect the dramatic difference between United States and Canadian equities. In order are the NYSE, NASDAQ, TSX and TSX Venture (TSXV) - showing the past five years.
While North American markets began a correction on Thursday, the big question on investor minds will be whether this is a very short term setback as we have consistently seen since 2010 or is this the start of something much larger.
Whatever it is, there is little doubt volatility will increase in coming months and investors will sit on pins and needles each time a correction of 1% or more occurs. U.S. equities remain expensive and investors are beginning to realize that moderate interest rate increases are on the horizon.
Good economic news will work against the market because it means the Fed will be considering an interest rate increase.
While blue chips took it on the chin this week, I did notice that the high quality microcap stocks I follow held up very well. That is because most are heavily weighted to cash and are FAR from being viewed as over-valued (the above chart of the TSXV clearly indicates this).
Even if risk aversion increases because of the market correction this week, I am expecting the better quality small stocks (Canadian penny stocks) should hold up relatively well.
John Hussman (hussmanfunds.com) is a relatively well known market analyst and fund owner. He has been bearish for years and while other funds were rolling in profits, Hussman was building a bunker full of pessimism and fear for his followers and investors.
He did have a very insightful comment this past week and below is an excerpt that sheds light on the current market situation in the United States – and the large risk that could be faced.
“The simple fact is that the primary driver of the market here is not valuation, or even fundamentals, but perception. The perception is that somehow the Federal Reserve has the power to keep the stock market in suspended and even diagonally advancing animation, and that zero interest rates offer “no choice” but to hold equities. Be careful here. What’s actually true is that the Fed has now created $4 trillion of idle currency and bank reserves that must be held by someone, and because investors perceive risky assets as having no risk, they have been willing to hold them in search of any near-term return greater than zero. What is actually true is that even an additional year of zero interest rates beyond present expectations would only be worth a roughly 4% bump to market valuations. Given the current perceptions of investors, the Federal Reserve can certainly postpone the collapse of this bubble, but only by making the eventual outcome that much worse.”