Beyond The 'Wall Of Worry'

by: Barry Ritholtz
(Update below) There is an interesting article in the Money & Investing section of the WSJ Monday morning: What Could Topple Bulls' 'Wall of Worry'?.

"The "wall of worry" idea is that stocks can still flourish when people are nervous. Skeptics hold money on the sidelines. As their fears are alleviated, they put money into stocks, pushing the market higher. The market keeps climbing only if worries are held in check. Here are some of the main concerns and what it could take for them to knock the market down."

Earnings_q2_07While I agree with the thesis, I reach a somewhat different conclusion. All of the issues raised in the article (detailed below) -- are at this point, very well known to the market.

1. High-risk investments: The biggest fear now is that some risky corner of the market could blow up.

2. Global growth: Strong global growth sustained by a U.S. consumer who refuses to stop spending, and by strong growth outside of the U.S.

3. Earnings: Investors now widely expect Q2 corporate profit reports to surpass analysts' lowered expectations of low-single-digit growth.

4. Inflation: Inflation fears knocked down stocks this Spring. The worries pushed the yield of the benchmark 10-year Treasury note above 5.0%.

5. The weak dollar: The dollar has been trading around a record low against the euro and a 26-year low against the pound.

6. Liquidity: Cash available to investors has been one of the market's main drivers. Created in part by low interest rates, by a booming world economy and by big dollar-denominated trade surpluses in the Middle East and Asia.

Are any of these factors likely to derail the markets? Or, is it more likely that the risk factors have been fairly well known, and have become more or less discounted in the overall markets?

And, whatever it is that may eventually derail the overall market momentum -- is it more likely to come from the list above? I suspect the markets have discounted most of the impact of those well known, well written about, well blogged factors.

Rather, what is more likely to derail the markets is something not well known or highly expected: Consider a major rally in the dollar, 7% interest rate, collapse of a major trading partner, sudden loss of liquidity, famine in a developed nation, War with Iran, $100+ Oil, Political turmoil in the U.S. -- something that is not currently on anyone's radar screen.

UPDATE: July 16, 2007 7:32pm

Perfect example of the unexpected: The Triple AAAs and Double AAs CDOs got whacked nicely Monday. So while everyone is focused on the true junk, it's the supposedly clean stuff that is the surprise.


What Could Topple Bulls' 'Wall of Worry'?
High-Risk Investments, Weak Dollar, Inflation
May Test Stock Rally
WSJ, July 16, 2007; Page C1

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