If you think the usual ho-hum economic news, inflation data and all the other “known knowns” are set to sink the stock market right now …
Spoiler alert: They won’t.
But there is something that really could sink the stock market.
It is a real threat.
And it will always be a threat as long as markets are an extension of a tightly-coupled financial system micromanaged by policymakers via artificial interest rates and “peace-time” quantitative easing.
So as the markets get started this week, keep this in mind:
More than 20% of North American companies (even outside the energy market) are losing money and a subsequent rise in defaults appears increasingly likely.
Credit spreads on junk bonds and investment-grade bonds are widening.
Credit conditions are beginning to tighten after a trend of easing for most of the last five years.
Remember: Policymakers have adopted “financial stability” as their primary mandate since the 2008 credit crisis.
Ironically, their efforts have merely helped to sustain a fragile financial system that’s prone to instability — even if just a single psychological domino falls.
In light of this week’s expected interest-rate hike at the Fed, the threat of reduced liquidity is a real danger for the type of market that policymakers have incubated.
Don’t get caught overexposed, because the market falls a lot faster than it climbs.
That said, there are times when it pays to bet against the crowd …