This Market Can’t Go on Much Longer

The stock market has surged 20% since the election, making it expensive by almost any measure. The drivers of the rally are well-known: Strong corporate earnings, solid global growth, central bank stimulus and a relatively stable global geopolitical environment. These positives have made the market one of the calmest of all time, which has given investors more confidence and further boosted stocks.

Can those factors continue? In most cases no, though the timing and size of the next shift is impossible to know. But these trends are interconnected and have reinforced one another on the way up. A crack in one could have an outsize impact on the rest.

.. The strong global economy has been a significant boost to the market. The basic reason is that companies in the S&P 500 get nearly 30% of their revenues from overseas. A weaker dollar, due in part to the slower growth, has further boosted profits. If higher rates in the U.S. boosts the dollar, profits will be under more pressure.
.. What can go wrong? The China debt bubble could finally implode or Europe’s period of political calm could end, but one of the biggest risks is a slowdown in the U.S., which is long overdue for a recession.
..  The problem now isn’t that there are more risks than usual but that investors are acting as if there are almost no risks. An upheaval involving any combination of Russia, Iran, Syria, North Korea or China might be just the thing to remind investors that the world, and the stock market, can be a dangerous place.