For the last two years the United States economy has largely been a very vigorous bull market, and in the last month alone the SP500, NASDAQ, and Dow Jones have managed to close at record highs at far greater frequency than ever before. Many analysts point to this brilliant performance as an indication of things getting “too good to last” – and they may be right. Late into the trading week US Indices closed poorly and consecutively. This week Asian markets have also slipped (excl.$SHCOMP), and European markets slightly retreated. It would appear that the world is prepping for a correction – one that hopefully will fail to snowball into a recession.
America is already poised for a debt crisis, swimming in more debt than ever before in history; a debt that will amount to $25 trillion by 2023. While US consumers are neck deep in debt with auto loans, student loans, credit cards, healthcare debt, and mortgages. Sooner or later the debt ceiling is going to collapse, and Donald Trump’s tax reforms will not help. The looming issue remains of how a country under so much debt can still generate so much growth, all of which is reflected in the stock market.
Moreover, January 3rd, 2018, is the effective date of the European Union’s MiFID legislative mandate. MiFID II is the second take on EU’s Markets in Financial Instruments Directive, which is effectively a revamped legislation that aims to provide more protection and transparency for investors within the EU. Many investors banking in Europe will be subjected to signing over previously undemanded tax documents and banks will be forced to adjust their practices to fit the new standard. The laws affect financial instruments; equity, ETF, Foreign Exchange and CFD, and Fixed Income assets – and indirectly cryptocurrency profit reporting. The directive for this standard is to ensure that the EU markets become as dynamic and competitive as US markets. However, many businesses are largely unprepared and will have to deal with penalties. Additionally, businesses that have failed to prepare for MiFID II will struggle to fit years of adaptation into the remainder of 2017. UBS has already estimated that MiFID II’s tickling effect onto U.S. market will plunder profits from Wall Street, and have downgraded their ratings for market-makers like Goldman Sachs, Morgan Stanley, Bank of America.
On their own these issues and uneasy events are easily solvable, but combined they evoke a rather precarious doubt in equity investors. Bullish growth portfolios and glittery tech mutual funds may not hold their own in upcoming market conditions, but before you type in S-P-X and press SHORT remember that the time of the bears has yet to come, and it is merely a good time to re-examine one’s positions, settle unrealized gains, and approach the market from a rational neutral perspective by hedging bull market positions.