At times when the stock market is rallying in the face of a range of some potentially negative macro environmental factors, it has been said Wall Street is “climbing a wall of worry.” Since the beginning of 2013, the aggregate measure of the U.S. stock market, the Dow Jones Industrial Average, has increased in price by approximately 18 percent.
Concerns that the Federal Reserve will alter its monthly purchases of $85 billion of U.S. Treasury notes and residential mortgage-backed securities are pushing longer-term interest rates higher. Over the past three months, the 10-year maturity U.S. Treasury note has increased in yield by approximately 1 percent to the current level of about 2.6 percent. At least a portion of this increase in yield can be traced to a concern the Fed may begin to purchase some amount less than its current monthly amount.
Persistent rumors that the sovereign debt crisis in Europe will flare up again exist. Various European banks hold a significant portion of their capital, funds in excess of liabilities available to absorb excess incurred risks, in these bonds. Defaults or some other sort of debt restructuring of sovereign debt could result in losses being incurred by these banks.
Overall economic slowdown in China is somewhat evident, although at approximately 7.5 percent annual reported increase, it is still one of the highest growth global economies. Slowdown is manifest by a dip in demand for a range of industrial raw materials. Concerns about the quality of the commercial and industrial loan portfolios in the Chinese banking system are being voiced. Some of those familiar with the shadow banking system in China are raising concerns about excess leverage in the overall financial system.
Yet with all these concerns circulating, the U.S. stock market indexes continue to climb.
Offsetting positive factors include the ongoing recovery of the domestic residential housing market. The latest reading of the Case-Shiller index, a measure of aggregate house price behavior in a range of larger markets in the U.S., showed continued positive pricing recovery with a year-over-year average pricing increase of 12 percent.
Second-quarter profitability announcements from those U.S. public companies that have reported have been generally positive.
Investors must weigh the positive and negative factors, not only domestically but internationally as well, to assess the outlook for economic activity. At the same time, too much economic enthusiasm can also be a longer-term concern. Potential imbalances in the supply and demand for labor and raw materials can introduce incremental inflation pressures into the equation.
Judging by the behavior of the U.S. stock market, the majority of the capital being put at risk is of the opinion the worries in the equity market are outweighed by the potential positive outcomes in the near term.
Kirby Brown is the CEO of Beneficial Financial Group in Salt Lake City.