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How an Economic Boom Could Eventually be Bad For the Stock Market | The Mesh Report

How an Economic Boom Could Eventually be Bad For the Stock Market

Dividend Sensei November 13, 2020 Comments Off on How an Economic Boom Could Eventually be Bad For the Stock Market

By Ben Carlson

On Sunday I wrote the following:

“It’s possible the stock market could see a sustained downturn if the pandemic continues to get out of control, a vaccine is further away than expected or the economy experiences another setback.

I’ve lost my ability to be surprised in 2020 so this certainly isn’t out of the realm of possibilities.

But this realm of possibilities could also see investors completely ignore elevated valuations and send markets to the stratosphere because of ultra low interest rates, a potential vaccine, a possible post-Covid spending boom, a huge fiscal stimulus plan from our new president or a continuation of a rising stock market in the face of terrible news.

The “smart” money has been bearish on the stock market for some time now while the young upstarts at Robinhood have been basking in the glow of seemingly ever-rising stock prices.

Watching other people get rich not only introduces career risk into investment decisions, it also gnaws at your psyche from a behavioral perspective. One of the biggest reasons FOMO exists is because it doesn’t seem fair.

Buffett is right that bubbles are a permanent part of the system in which we invest.

It wouldn’t shock me if the events of 2020 lead to a massive bubble from some combination of low rates and investors seeing people “dumber” than they are getting rich.”

Then on Monday, the big vaccine news from Pfizer hit. So game on? Roaring 2020s is on the table?

I believe this is a possibility…but obviously not a foregone conclusion. When I put this out on Twitter, Jim Bianco threw some cold water on my theory:

At first glance, it’s hard to imagine how an economic boom could actually be bad for the stock market but Jim’s pushback here has some merit. There are always risks in the financial markets, even when there is potentially good news.

First of all, it’s important to note that interest rates rising in and of themselves is not necessarily a bad thing for stocks (or bonds for that matter). I wrote about this a few years ago:

The average performance of the S&P 500 during these past rising rate environments was almost 22 percent in total returns. Only three times did stocks fall when the 10-year rose by 1 percent or more, and the largest losses were just under 2 percent. So stocks have held up well in the face of rising interest rates over the past 50-plus years.

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