What are the potential risks threatening markets?

A silent credit freeze, falling money supply and overreaching crypto regulations are a few risks worth noting

Investors must free themselves of recency bias and weigh potential new events in the next three to 30 months. Reuters
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Newsflash! The world didn’t end in 2023. Last February, I told you widely watched fears from rate hikes to inflation, Chinese growth to global recession and war were false – they wouldn’t sink global stocks.

And they didn’t. Even with multiple widespread worries added, global stocks soared 23.5 per cent in 2023.

Why? Markets pre-price fears. Real risks are unseen shocks.

I warned of some unlikely but real stealth torpedoes in my February column. They didn’t materialise either – but they weren’t defused.

Here is an update on risks, both ruses and real.

Last February’s column preceded bank failures and fears of “systemic” financial risks. Those began on March 10, when America’s Silicon Valley Bank (SVB) failed.

Signature Bank fell days later, with Swiss giant Credit Suisse next collapsing into rival UBS’s arms.

Many envisioned bank “contagion”. The KBW Regional Banking Index (tracking small US bank stocks) plunged. Now? It is up 6.7 per cent from pre-SVB levels, obliterating the fear.

European junior bank bond issuance, feared dead after Credit Suisse’s peculiar bailout, recovered.

Central bank fears? Fast Federal Reserve and European Central Bank hikes through summer didn’t kill stocks or gross domestic product.

Now many eye cuts. Maybe. But I have long said central banks are more reactor than causer, far weaker than most think. Their actions are unpredictable; their words worthless. Ignore them.

Despite the chatter, markets have. Global stocks rose with rates since this bull market’s October 2022 birth.

China’s “weak” economy? This year’s growth was a healthy 5.2 per cent – rejoining pre-Covid trendlines.

A global recession didn’t come, outside exceptions like Germany. Even that held no negative shock, given near-universal recession expectations entering 2023. Hence, Germany’s DAX hit December record highs.

Russia’s Ukraine invasion persisted throughout 2023 as an ugly fear … yet coldhearted stocks climbed.

They kept climbing after Hamas attacked Israel, renewing war fears. Many assumed a Middle East war would spike oil and tank stocks. No.

Fighting erupted amid a broader correction. Yet stocks bottomed in days, then surged to record highs. Israeli stocks now top prewar levels.

Oil is down despite Red Sea tanker attacks. This conflict lacks scope to interrupt commerce and hit stocks.

Middle Eastern war, though always tragic, happens too often to constitute a large and truly shocking market threat.

These ruse risks not only didn’t knock stocks, they also formed bricks in 2023’s “wall of worry”.

By keeping sentiment low, they fostered positive surprise – stock market jet fuel.

What about potential risks I detailed? Thankfully, none struck.

Geopolitically, while Ukraine and Gaza aren’t torpedoes, war between India and Pakistan – potentially involving China – could be. That hasn’t happened.

But Pakistan and Russia buddying up, possibly supporting the former’s Brics entry bid, could rile India anew. Stay alert. These three nuclear neighbours aren’t friendly.

I warned of a silent credit freeze – not from bank failures, but from loan growth falling below inflation rates, implying contracting credit.

This risked a deeper recession than markets had pre-priced. Keep watching.

US loan growth slowed from 12.2 per cent year on year at the start of 2023 to November’s 3.3 per cent. That nearly matches November inflation, suggesting vast cooling.

Behind that lending and inflation slowdown? Falling money supply. US M4 – the broadest money supply measure – fell 1 per cent year on year in October.

Normally, that might concern me. But it follows a peak rivalling Mt. Everest. So, it isn’t so abnormal.

US deposit’s interest rate rise – to 0.46 per cent in December from February’s 0.35 per cent – partly reflects increased bank funding competition.

If it escalates, lending’s profitability could tumble, further curtailing credit. Few watch this – so stay alert.

Overreaching cryptocurrency regulation was concerning. The world’s crypto crackdown included criminal charges for FTX’s founder and Binance’s chief executive.

Overreaching cryptocurrency regulation was concerning. But sweeping regulation reaching beyond crypto into ancillary assets hasn’t happened
Ken Fisher, founder, executive chairman and co-chief investment officer, Fisher Investments

But sweeping regulation reaching beyond crypto into ancillary assets hasn’t happened. It still may.

Then came a new regulatory risk: artificial intelligence. Excessive rules towards it could similarly stymie innovation.

The EU’s new package looks navigable for Big Tech. But talk abounds of more globally. Stay tuned.

As always, my main fear is something huge nobody foresees – a true wallop. To monitor for that, clear your mind of today’s events.

Recency bias – the tendency to overrate or use recent events to forecast – blinds.

Many mistakenly think an endless search for “the next” Ukraine, inflation fuse or SVB is forward looking. No. They reprise yesterday’s fears – fighting the last war.

Free yourself from this psychological trap. Weigh potential new events in the next three to 30 months, not those from the last three to 30.

Watch for stealth risks – don’t fret about widely watched, false fears – which as 2023 revealed are everywhere.

Next month, I’ll give you my 2024 forecast. Stay tuned.

Ken Fisher is the founder, executive chairman and co-chief investment officer of Fisher Investments, a global investment adviser with $200 billion of assets under management.

Updated: March 06, 2024, 12:18 PM