5. Gridlock in Washington looks worse than ever. Since the November 8 election, stocks have climbed more than 15 percent on the expectation of tax cuts and fiscal stimulus. Suddenly, it appears fewer objectives of the Trump administration will materialize than many had hoped for. Cucchiaro wonders what might happen if some actor in Washington makes a major policy blunder, instead of simply dithering. A policy blunder from Washington? But of course that could never happen.
6. A major cyber-attack on our infrastructure, electrical grid or financial system has become a larger risk. Hackers are getting more sophisticated and their ability wreak havoc is rising.
7. The profits recession of 2015 is over and corporate bottom-lines are throwing off record amounts of income. What if this is the last great quarter of corporate earnings for the current cycle, Cucchiaro posits. It’s hard not to notice that the market is punishing companies that miss earnings guidance this quarter while rallying significantly when a company reports a major surprise to the upside.
8. What about a bond market meltdown? After 35-year rally in bonds, interest rates remain near historic lows. Most major central banks are all trying to normalize on a synchronized basis; Cucchiaro thinks the 10-year Treasury should “logically” be close to 3 percent. Were rates to re-enter a normal range, bond yields would become more competitive versus dividends and PE multiples could contract.
The odds of any one of Cucchiaro’s scenarios occurring is quite low. But one might want to ask what are the odds of none occurring.
How could you hedge against them? Cucchiaro offers three general guidelines to hedging against different outcomes.