10 Things That May Scare the Hell Out of Investors Going Into the Fourth Quarter of 2016

September 29, 2016 by Jon C. Ogg

It is no secret that 2016 has been a complicated year. U.S. stocks have risen while bond yields remain muted. The election has many on edge, as does the central bank trend. Now there could be at least some cracks in the bull market’s armor after seven and a half years of gains. And there are of course economic risks to consider for the base economy.

There is more than just one issue in banks. Then there is the 2016 election — oh, and the calendar looks crummy for stocks as well. Oil remains a risk, up or down. International watchdogs keep ratcheting down global GDP growth, and U.S. GDP growth may remain muted. Stock market valuations and capital returns could spell trouble. And what about the central banks and negative interest rates?

24/7 Wall St. has jumped right into the big risks impacting the market as we are about to head into the fourth quarter of 2016. It is not just a bash on stocks, but maybe on everything that has a price or can be invested into. We haven’t even gone over geopolitical risks and terrorism.

Before you hit the panic button, remember a few things. Investors have bought every single pullback with vigor. Investors also have to invest somewhere, and negative or no yield on cash will not satisfy a single long-term goal. Even after retail weakness, the most recent consumer confidence was stellar.

These are not in any specific order, nor have they been ranked. Here are 10 things that might be scaring the hell out of investors heading into the fourth quarter of 2016.

The 2016 U.S. Presidential Election

Let’s get beyond any individual’s politics here for a moment. The reality is that there is dissent among the Democrats and Republicans alike. May Democrats do not want to vote for Hillary Clinton and many Republicans do not want to vote for Donald Trump (seriously, go look for bumper stickers and see how few you see). Both candidates seem to have policies that are not what their historical counterparts would be endorsing. Many insiders and outside worry about the trade and tax policies being presented in 2016; ditto for how other social programs will be paid for. This is of course very complicated and it happens almost every election, but this time feels different. Enough said.

Is U.S. Bank Trust Broken Again?

Wells Fargo & Co. (NYSE: WFC) may have single-handedly destroyed the trust that Main Street was getting back about the banking sector. Despite the bank having been the most prestigious in America, the cross-selling that led to millions of unauthorized account openings has destroyed a lot of good will that was already fragile. If one fear should come out of John Stumpf’s grilling in testimony in Washington, D.C., it is not just that Stumpf’s job might be at risk. The real fear is that this cross-selling is now going to create a Senate or House grilling of all the major banks ahead — it is a serious risk if you watched the testimony. Like deja vu, all over again. More regulation and capital restrictions seem more likely as well.

Euro/Bank Risks

Deutsche Bank A.G. (NYSE: DB) has not been as forthcoming or realistic about its financial situation after a $14 billion fine is being sought. The bank reportedly has had hedge funds limiting exposure to the bank’s exposure. Whether this is true remains to be seen. Either way, the reality is that this is going to bring fears of the financial crisis all over again. And all-time lows for the American depositary shares cannot offer any comfort. Then there are the macro issues in Europe. All those risks for Brexit were contained initially, but the reality is that the path and the outcome remain in the air ad may not be known until 2017. And Italy has a vote and referendum coming in December that is not yet known.

The Price of Oil, and Relation to Markets

Oil has been unable to get back above $50 per barrel and remain there. The stock market used to follow oil prices, when oil dropped so did the stock market. Now the correlation seems less tied, but the price of oil remains a risk whether we are talking up or down. The latest OPEC cut sounds great, but the reality is that this production cut has already seen numerous doubts about how strong or real the cuts would be. Even at $50 per barrel, some oil companies are either unprofitable or will operate in a zombie-mode.

Global Growth Down-Ticked, Again

The International Monetary Fund (IMF) just downgraded growth. This is becoming all too frequent, that global growth keeps getting guided lower and lower. At some point, Uncle Sam might be unable to keep growing if the rest of the world stinks. U.S. GDP growth looks set up to disappoint for 2016, even if the second-quarter GDP was revised marginally higher. If you can find anyone excited about U.S. GDP being revised higher to 1.4% in the second quarter, please do share. The weakness keeps persisting in low durable goods readings and national activity is slowing as well.

Valuations Remain High (For Stocks and Bonds)

Even in mid-September, the S&P 500 was valued at 17.7 times the forward 12 month price-to-earnings ratio. It peaked above 18 times, but this is a premium to the 16.5 average of late. Earnings growth has also stalled, and not just in energy stocks. Do sky-high valuations in some top stocks make for a bubble? Is there a bond market bubble? That depends on whom you ask, but it is real hard to argue that you have to invest for five years in Treasuries just to get a 1% yield. And a 10-year yield of 1.5% and a 30-year yield of 2.27% do not sound very rewarding when you consider the price risk to those bonds if rates were to rise just 1% higher.

Dividend Growth and Buybacks Petering Out

We have seen endless dividend hikes in recent years. Unfortunately, that rate is expected to slow. With earnings petering out and with so much cash overseas, the reality is that it might not be worth borrowing money and creating more debt to keep buying back stock or sending out dividends. Corporations also have record cash balances outside of the United States that would take a 35% penalty to repatriate. If earnings growth and underlying GDP growth are elusive, at some point companies will decide to hold their cash. S&P even warned about slow dividend growth this summer.

Central Banks

The U.S. Federal Reserve wants to raise interest banks. They keep delaying that rate hike, but they keep jawboning about one rate hike in 2016 and then five more rate hikes spread over 2017 and 2018. The real issue is that negative interest rates in Japan and Europe have not driven the results that many investors were hoping for. Maybe negative rates drove asset prices, but they are not showing the outcome for driving the underlying economies. Over $10 trillion worth of sovereign debt remains at negative interest rates. How these central banks will ever unwind the endless assets they own now may be as simple as “they just can’t and won’t,” but how comforting is that? Many arguments exist that central banks just can no longer do the job they used to do.

The Calendar Is Awful for October (and End of September)

If you want an open quick hit for market sentiment, the Stock Trader’s Almanac often is a home run for info. This group showed that the last trading day of September is historically bearish. In fact, they warned that the S&P 500 was down in 15 of the last 21 instances. Maybe they were a day early? Still, the Almanac shows that October’s history is frightful with a history of market crashes (1929, 1978, 1979, 1987, 1989, 1997, 2008). They even use the term “Octoberphobia” as the phenomenon of major market drops occurring during the month. Still, they point out that October also has been a turnaround month as a “bear killer ” while pointing out that election-year Octobers rank dead last of all months for the major U.S. market indexes.

Billionaires, Pundits and Hedge Funds Aren’t Happy

When was the last time you heard a market pundit real positive. Jeff Gundlach, the new bond king, has warned that everything is overvalued. Bill Gross, the old bond king, has warned that risks are high and opportunities for returns may be muted for years and years. Mark Faber, who may be Dr. Doom, recently said on CNBC that investors are on the Titanic. How many hedge funds have you heard of closing their doors this year? And how many fund managers keep saying that their historical efforts and outcomes just are not working any longer? BlackRock Inc. (NYSE: BLK) also warned about bond valuations.

Admittedly, a lot of things have been glossed over here. You probably noticed that housing drops and rent prices were not addressed; ditto for gold and commodities — and we did not address health care and drug cost issues ahead. It is quite possible that none of these 10 issues will amount to anything very much. Then again, we are now closer to the bull market being alive for eight years than we are seven years. Nothing lasts forever. Stay tuned.

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