The stock market will be up against a lot of problems in the coming months. Today, I’m going to tell you about the trickiest — the wild card in the bunch.
In my previous two columns, I’ve gone through 11 concerns — the bricks in the “wall of worry” that the stock market will be climbing. Those include the conflict with North Korea and its fallout with other countries, possible trade wars, the uncharted territory faced by the Federal Reserve, and the perpetually weak economy.
Today I’m going to make it an even dozen by adding violence in the US to the list.
Anyone who has followed Wall Street for a long time knows that the stock market has not been behaving normally. In normal times stock prices rise a bit. Then investors take profits and prices come down.
These pullbacks are healthy because they bring new money into the market. And they eliminate any complacency in investors’ minds.
Stock prices have pretty much been rising for years. The pullbacks — which are normally 10 percent and sometimes even 20 percent — haven’t occurred. Today, a one-day selloff of 1 percent is treated like the end of the world by investors and the media. Anything worse and they are likely to panic.
That’s one of the reasons why many longtime market analysts and big-time investors have been issuing warnings that stock prices are too high and that the market is in a bubble.
It isn’t that they know something is wrong. It’s that they feel something is wrong. Something is different. That gets me to the idea that violence in the US might be the trigger to bad things on Wall Street.
There are two types of violence that I’m talking about — one caused by Americans against Americans and the other caused by outsiders against Americans.
Politically, I think that any kind of violence helps a tough-talking politician like Trump. If people feel unsafe they want someone who’ll promise to kick ass.
But foreigners may see things differently and this is where the stock market should be concerned. Investors don’t like chaos. And if Washington seems to be coming apart at the seams then foreigners might start pulling their money out of US assets.
The violence, on top of all the other things I mentioned, might be the tipping point. America might no longer be considered a safe haven for people who live in places where their assets might not be protected and where they, themselves, might not be welcome.
There are already reports that Chinese investors are pulling out of US real estate or investing less. That’s primarily because of restrictions on the flow of capital out of China, but worries about trouble in the US government could add to the selling.
Give other governments a reason to put on similar restrictions and that could be the thing that prevents foreigners from buying stocks, bonds and other assets.
And violence here in America — if it is perceived to be out of control — could also have a lasting negative effect on the reputation of the US dollar and cause it to lose value.
What will a crisis look like? It’s simple. Foreigners suddenly think there are better places to safely park their money. So they stop investing in US companies.
Or they quit buying US government bonds. If they do that, bond prices fall and interest rates rise even if the Fed isn’t encouraging higher borrowing costs. Once rates are higher it costs everyone in America — regular people and companies alike — more to borrow money.
This hurts corporate profits and the economy. In addition, it causes the Fed to further lose control over monetary policy and the economy. This is a disaster but one that could happen if the world perceives the American political system as being in complete disarray.
Clashes like the one that recently happened in Charlottesville, Va., alone probably won’t be enough to scare off foreign investors. But put enough of them together, add a media that is apt to exaggerate, and that might do the trick.
The Democrats’ seeming refusal to adhere to the results of last November’s election could also make a dangerous situation worse. The so-called “resistance” against Trump’s presidency is unprecedented and incredibly dangerous in a democracy where elections are supposed to settle things, not stir things up.
In the US we might see this resistance with some degree of nostalgia, having gone through it once in the 1970s, when Richard Nixon was president, and a little bit during the impeachment of President Bill Clinton.
But the same political setup can play out differently in different times. It’s difficult for even Americans to figure out what’s happening when white supremacists are marching in one town while Maxine Waters, a California lawmaker, is calling for the creation of a political party of black people.
Violence against America could, of course, come from another source — and I don’t mean North Korea. Terrorists have been inactive in this country for a relatively long period of time.
But as I’ve been telling my readers, the US Department of Homeland Security is worried about a major attack coming out of Mexico. And what they are worried about isn’t a run-of-the-mill, lone-wolf terrorist.
They are concerned about something organized. Something professional. Something big. Something lasting.
Will something like that be what spooks Wall Street? I don’t know. Nobody knows.
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