With the U.S. stock market recovering to levels above the previous market highs achieved in October 2007, investors continue to look for indicators of potential retracement. While reported U.S. corporate earnings remain reasonably healthy and corporate balance sheets appear fairly strong on average, potential drivers of future stock market performance may lie beyond these traditional indicators.
There is no doubt that some of the fuel driving U.S. corporate profits is being supplied by the Federal Reserve Bank. With short-term rates pegged at near zero and through purchases of longer-term U.S. Treasury and Mortgaged Backed Securities totaling about $85 billion per month, the Fed is attempting to keep a tight grip on interest rates. Any dramatic or sudden changes to these monetary policies could be manifest in increased stock market volatility.
Increasing global complexity, the free flow of information across time zones and national borders, and ever-increasing multinational commerce all lead to additional interconnectedness of the world’s capital markets. Economic, geopolitical and societal shifts in one region of the world affect other nations in unforeseen and unintended ways.
In a study recently published by the World Economic Forum, a wide range of global experts and industry leaders were surveyed about their views on the likelihood of key risks occurring and the potential effects of these occurrences.
Two risks topped the list of those events most likely to occur in the next 10 years. Severe income disparity and chronic fiscal imbalances each received an equal amount of attention as those events most likely to occur in a meaningful way across the globe.
In terms of the risks that this group of experts indicated would have the greatest impact on the world if they were to occur, a major systemic financial failure and a crisis involving the water supply for a significant portion of the world were deemed most critical.
Potential repercussions from these four significant risks should not be underestimated. Even if one of these risks were to emerge in a foreign country or region, global commerce and capital markets would likely reflect the emerging risk through increased price volatility.
Staying informed about local, national and international economic, political and societal themes and topics is an important consideration for many investors. Even with the wide range of potential risks across the world, the U.S. and most other global stock markets have looked beyond these themes for now and moved upward thus far in 2013.
Kirby Brown is the CEO of Beneficial Financial Group in Salt Lake City.