Indisputable Trends and Unrecognized Themes
by James Paulsen, Chief Investment Strategist, Wells Capital Management
Like many animals, investors often move in the comfort of packs. At any moment, certain trends are accepted by most as indisputable. Likewise, there are typically a few important themes, which are either unrecognized or underappreciated by the pack. Combined, consensus indisputable trends and unrecognized themes can represent potential shocks to the investor mindset. Should an indisputable trend surprisingly end in discord or if an underappreciated theme suddenly becomes a market focus, a pack of investors are forced to alter positioning usually resulting in financial market turbulence.
Stock market vulnerability, therefore, can sometimes be judged by the strength of consensus convictions and the lack of popular attention toward what may prove to be important events. We highlight five contemporary indisputable trends and three current underappreciated themes that have the potential to destabilize the stock market.
Indisputable trends
Often during bull markets, certain financial trends persist long enough to become indisputable among the consensus. Today, five strong trends are widely expected to continue and consequently could become problematic for the stock market if any prove vulnerable.
The U.S. dollar can only go higher (right?)
This may be today’s strongest and most widely accepted indisputable trend. Very little dispute about which way the U.S. dollar is going. The strength of this conviction, however, it what makes the U.S. dollar a significant risk factor for the financial markets. Conventional wisdom accepts that with the U.S. Fed beginning to tighten policy just as most other global policy offi cials are getting more accommodative ensures the U.S. dollar is a freight train going higher. We think economic policy differentials are less important in establishing currency values than are the impacts of those policies. In our view, the U.S. dollar strengthened last year because real economic growth abroad slowed more than it did in the U.S. If the accommodative economic policies recently employed abroad are successful, the pace of foreign economic growth relative to the U.S. is likely to diminish and force the U.S. dollar lower.
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