You might compare investing today to juggling: You need to keep several balls or pins in the air and make sure they don’t hit the ground.
That’s the tradeoff between risk and reward, hope and danger, that confronts us now.
As I’ve stressed in these commentaries and my MarketWatch column, the fundamentals for stocks look very good now: a strong economy, subdued inflation, very low interest rates by historical standards, and great earnings, all without outlandish valuations.
But there’s a lot of uncertainty as well, particularly about trade and geopolitical issues involving North Korea (subdued now because of the planned upcoming summit between President Donald Trump and North Korean President Kim Jong-Un); the Middle East, particularly Syria, and longer-term concerns about growing household and government debt burdens.
That has translated into rising share prices because of fundamentals but increased volatility because of all the uncertainty.
Which one will prevail?
Well, it’s hard to say, given the quirky, unpredictable nature of our president. He appears to speak loudly and carry a small stick—or to put it another way, his tweet often is worse than his bite. The president tends to make wild declarations only to reverse course, offer a milder alternative, or completely forget about what he was promising—sometimes within the same day. And who knows how the various investigations will factor in to policy decisions?
That’s why a trade war could be catastrophic—or it could be just rhetorical posturing; North Korea could wind up with a permanent peace deal—or more nuclear tests and brinkmanship; the U.S. and Russia could have a showdown over Syria—or the president could just lob more missiles at Syrian air bases if Syrian President Bashar al-Assad uses chemical weapons again. We just don’t know, so all we have are guesses.
The traditional big threats—sustained inflation, much higher interest rates, recession or yet another financial crisis—look remote now. That could change, of course, making this market look much riskier. And the current bull market has gone on for more than nine years. At some point, it will run out of steam or succumb to the business cycle.
But for now, the uncertainty is impossible to quantify, which is why volatility is higher. That shouldn’t keep stocks from ultimately moving higher, although it’s likely to be a much rockier ride.