Most investors missed the big relief rally off of the recent bottom at S&P 1812. And most are still on the sidelines wondering if they should be getting back in now on any weakness under S&P 2100, as the market still looks poised for new highs this year.
While skepticism, short-covering, and FOMO (the "fear of missing out") definitely drive stock rallies no matter how questionable the earnings fundamentals, I think investors should be focused on 4 "event risks" for this market that could make buying new highs a treacherous game.
Event Risk #1: The Fed Wants to Hike Soon, Maybe June
Fed Chair Janet Yellen and her fellow doves gave markets a big sigh of relief in March when they ratcheted back rate hike projections from four this year to just two. After that FOMC meeting, I wondered if she had just "slain the bear," or at least the increased potential for one.
Then on March 29, Chair Yellen gave a speech in which she beat back any ideas that Fed hawks were still going to get more than two rate hikes this year. She reassured that because of "global developments" they would "proceed cautiously." And with those words, she ignited the next leg of a "risk-on" rally because global investors knew money would stay easy for longer and that a solid Fed put was in play.
The Fed is also well aware of the Earnings Recession caused by the Oil Bear and the resulting high-yield credit stresses. This is why the Yellen Fed was eager to temper down expectations for rate hikes in order to keep the US dollar soft and protect the US manufacturing contraction.
So if they know the next rate hike will only increase the policy divergence with central banks in Europe and Japan and thereby make the dollar stronger, why would they even consider a June rate hike? Because the primary economic data thresholds they watch - employment and inflation - are both arguing for a steady move toward normal credit conditions. They can only hold off for so long before they look weak, or political.
This means they have some big decisions to make about timing. They probably want to get at least one more hike on the books this year. And they probably would prefer to do it at a quarterly meeting where fresh economic projections and Yellen's press conference can further manage expectations.
So do they wait until September right before the election, or do they go boldly right before the UK "Brexit" vote? Lots of uncertainty for markets with other potentially-negative catalysts. This brings us to the next issues on the event horizon.
Event Risk #2: Brexit is a Volatility Cauldron for Europe
On June 23, British citizens vote in a referendum on whether they should remain part of the European Union. While they don't completely share in all the benefits and obligations of the 19-member Eurozone of countries that have the euro as their common currency, as a member of the 28-member EU bloc they do have certain rights and interests in economic, trade and political agreements.
Beyond that, a decision to leave the EU would be seen as big vote of "no confidence" toward the greatest common currency experiment in history because it would remove the UK one more giant step from ever adopting the euro. And clearly, global investors see a downside for the UK itself as their currency, the pound sterling, has dropped over 5% in the past six months.
If the British vote to leave the EU, it will probably ignite more volatility in global financial markets because it upsets the structure and flows of numerous bond and interconnected credit markets. There could be unforeseen liquidity issues for many financial institutions and sovereign entities.
Event Risk #3: China Yuan Devaluation
Last August when the Chinese central bank surprised markets with an immediate 2% adjustment to the dollar/yuan currency peg, it sent the S&P 500 into a two-week 12% correction. Granted, the market may have been ripe for a sell-off. But out-of-the-blue financial events like this are often the catalyst.
The importance of this now is that many veteran currency and bond market experts, who have seen this devaluation movie before, believe that the Chinese are nowhere near done letting their currency fall in order to become more economically competitive with the West.
The current dollar/yuan peg is around 6.5 and most observers expect that over the long term, it will rise (meaning a weaker yuan) to over 7.5, or another 15%. While the Chinese have actually been buying yuan against the dollar for several quarters to stem the rapid exodus of private wealth, at some point they will probably initiate another "surprise" jump down in value.
Although somewhat expected now, we never know when the jump will come. Thus, it will be a shock to markets.
Event Risk #4: The Election
If global investors were ever worried about a Donald Trump presidency, they sure are not showing it. What the master of promotion and in-your-face politics lacks in clear, consistent and compelling policy ideas, he makes up for with no-holds-barred political combat. He is nothing if not a confident, strongly opinionated and compelling leader.
And so far, equity investors haven't seemed as concerned about the uncertainties he represents as the GOP political establishment is. But with his "yuuge" sweep of primaries this week in five Eastern states, racking up another 100 or so delegates, the idea of a Donald Trump presidency gets even more real.
The closer we get to the July GOP convention and then the general election in November, the more opportunities for emotional investor reaction will surface because the more answers we will get about policy initiatives from both nominees. That makes two "event risk" windows around the election when the uncertainty about trade, taxes, regulation, spending and even monetary policy could matter a lot more to voters and markets.
There will come a time this year to buy new highs in this market. I just don't believe that, with these 4 events on the horizon, the time will be this summer.