But remember, risk factors aren’t predictions
Based on this analysis, both of these risk factors could rise to material levels in around two years or so, at about the same time a recession seems likely. Just as with the recession factors, however, these potential bear market risk factors are just that. You can make good arguments against both. For instance, oil prices are likely to stay in a relatively low range given changed market dynamics, and the Fed is very likely to keep rates low and hike much more slowly than in the past. I get it, I really do.
At the same time, to assert that this time is different is a classic mistake in investing, even if in many respects it is. Considering the very real possibility that these risk factors could show up again, I will continue to watch them.
You can also argue that the timing is speculative, and I would agree with that. In this context, two years probably means something between 12 and 48 months. Again, the point is that risks will be increasing over the next year and more, and we need to keep an eye on them.
Next up, valuations
Tomorrow, in the context of my Monthly Market Risk Update, we’ll analyze the final (and arguably most important) risk factor, an expensive market. Although the other factors speak to fundamentals of the economy, valuations are different in that they reflect a simple reality: falling out of a tenth-floor window will hurt more than falling out of a first-story window.
In tomorrow's post, we’ll talk about just how high up the market is now sitting.
Brad McMillan is the chief investment officer at Commonwealth Financial Network, the nation’s largest privately held independent broker/dealer-RIA. He is the primary spokesperson for Commonwealth’s investment divisions. This post originally appeared on The Independent Market Observer, a daily blog authored by McMillan.