Risk or ruse? Today, false fears fly, with bears citing endless “risks” supposedly set to whack the TSX and world stocks. The Middle East and Ukraine. Delayed rate cuts. Debt-devouring developed economies. On and on. Wrong! For stocks, these widely watched worries are old news.
Real threats must be economically significant events that are broadly unseen – stealth torpedoes not priced in by markets. My March, 2023, column detailed several. Thankfully, none have struck … yet. While I am bullish, some of those concerns remain worth watching out for later this year and into 2025 – plus some new threats.
Let’s start with the “silent” credit freeze – which I described last year – stemming from global loan growth (which isn’t inflation-adjusted) falling too far below inflation rates, implying contracting credit. Global loan growth has slowed notably since last year. In the 12 months through March, U.S. loan growth fell from 10.3 per cent year-over-year to 1.9 per cent – below U.S. CPI’s 3.5-per-cent rise. Canada’s January non-mortgage loan growth (the latest data available) slowed to 3.1 per cent year-over-year, from the previous year’s 9.2 per cent – only a hair above Canadian CPI’s 2.9-per-cent March rise. However, inflation’s broad cooling means there is nothing hiding lending’s slowdown now. I doubt this threat proves real as a result.
Regulatory risks? New rules around cryptocurrency haven’t had a knock-on effect on other assets – so far. The world’s crypto crackdown mostly features FTX’s Sam Bankman-Fried’s prison time and charges against Binance’s chief executive officer. But watch for more rule making after bitcoin’s U.S. ETF approval, followed by this spring’s short-lived rally and “halving” hype, which sees the amount of bitcoin produced slashed by 50 per cent. Ditto for British Columbia’s high-profile crypto heist case in the summer, when hackers siphoned funds from a major crypto platform. And then there’s the EU’s rollout of its Markets in Crypto-Assets regulatory framework, which has come under scrutiny for its unintended consequences.
Another regulatory risk: artificial intelligence. Not killer robots, but rules surrounding AI that could stifle innovation and growth. Canada’s proposed Artificial Intelligence and Data Act is too slow moving to have much effect. Same for the EU’s AI Act, which seems navigable for Big Tech. But the G7′s Hiroshima AI Process, an international set of principles for the development of AI, could prove consequential.
A risk hidden in plain sight? U.S. politics. No, not the endlessly discussed election south of the border. Legislation is the key for stocks. With gridlock reigning in America, I see little chance of divisive, economically significant bills passing in 2024. But 2025? Newly elected presidents, or those winning a second term, always try cramming big, signature bills in early – before their popularity and political capital fades – sending legislative risk spiking. Hence, markets are much more variable early in presidents’ terms than late. This is especially true if the winner has sufficient popularity to swing the House and Senate elections to their party. Such popularity risk doesn’t seem likely this year, with 2024′s broadly disliked candidates. But it is possible.
Beyond legislation, if former president Donald Trump wins, many investors – seeing him as pro-business – might get exuberant. They may salivate over tax cuts or deregulation, teeing up 2025 disappointment when those moves don’t materialize or lack the bullish effect expected.
Geopolitics? Many worry Ukraine and the Middle East threaten stocks, especially with Iran’s increased involvement. But both are economically small and too long discussed not to be heavily priced into markets already. Taiwan/China tensions? War risk there is no more elevated now than in past years. That risk has likely fallen, with a China wary of finding itself in a situation like Vladimir Putin’s idiotic Ukraine quagmire.
But risks emanating from nuclear-armed China, India and Pakistan remain underappreciated. Historical border skirmishes, conflicting religions and cultures and competing economies and politics keep tensions simmering. In Pakistan, political uncertainty remains high after the new coalition government squeezed out the party of freshly incarcerated former prime minister Imran Khan, despite its first-place position in February’s election. His conviction appeal, which could further destabilize Pakistan, is now pending.
China? President Xi’s endless new economic restrictions mean China’s “miraculous” past growth is finished. India chafes – wanting to act as a regional linchpin playing East against West – and stews enviously as China favours Pakistan over it. China wants to thwart India’s progress, seeing initiatives like Prime Minister Narendra Modi’s Himalayan infrastructure build-out as infringing on land China claims as its own. The odds of war aren’t high, but they aren’t tiny, either. And they could embroil the world’s two most populous nations – and its second – and fifth-largest economies.
Again, I am bullish for 2024 – stocks should deliver good-to-great full-year returns, as my forecast detailed. But risks always exist. My biggest fear? The threat no one sees, me included – a true wallop. To identify one, clear your mind of all recent events. Don’t seek the next Ukraine, Middle East or inflation fuse. That is fighting the last war when it comes to assessing threats to the market. Instead, contemplate truly new, undiscussed events possible over the next three to 30 months. Those, if emergent, are the risks markets haven’t reckoned with … yet.
Ken Fisher is the founder, executive chairman and co-chief investment officer of Fisher Investments.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.