The biggest risk to any investment is the unforeseen. Yet being blindsided by some type of unimaginable calamity rarely wipes out empires or evaporates fortunes, which is why most investors focus instead on trying to avoid more predictable disasters.
To that point, seasoned Wall Street veteran Hugh Johnson reveals three things in the attached video that actually worry him right now. Not meteor strikes or pandemics, but the sort of things you need to keep an eye on to prevent yourself from getting burned.
1) Rising interest rates
The prospect of interest rates rising further is clearly a widely held belief. But where the discussion gets heated is when you try to figure out whether that is simply a reflection of economic vitality or a reduced role by the Fed. There’s also a question of threshold, or specifically, at what point do these rising rates actually start to do harm.
Tthe chairman of Hugh Johnson Advisors says he is decidedly more confident than most of his peers, as he expects the Fed’s policies will be able to keep rates low through the middle of 2015.
There’s also some argument over the level at which an economic pinch-point occurs, whether it's when the 10-year Treasury yield hits 3.25% or the more widely held belief of closer to 4%.
“I’m crossing my fingers that my forecast, which is for a benign interest rate environment, is right,” Johnson says, reiterating his prediction that they won’t rise that much but underscoring the risk of harm if they do and he is wrong. “If the consensus is right, be careful.”
It’s worth noting that in a note to clients last week on the subject, Raymond James strategist Jeff Saut wrote, “if everyone is asking the same question, it’s probably not the right question.”
2) European Rebound Stalls
With U.S. stocks trading close to record high levels and also seen by most as being long overdue for a correction, the temptation to look elsewhere - or abroad - for value seems logical. Especially in Europe, where the Euro Stoxx 50 index (FEU) has rallied to levels not seen since 2008.
“Europe is really important to the recovery of the U.S.,” Johnson says, before noting that leading indicators and consensus GDP forecasts for Europe are both moving higher. “But believe me, we’ve seen some (fourth quarter) numbers, particularly out of the kingpin in Europe, Germany, that are a little bit troubling and not as strong as we expected.”
He calls this situation a big risk that bears watching since any slowdown would have a huge impact on economically sensitive U.S. companies.
3) China Disappoints
Johnson says China is currently going through an extraordinary shift in its economy, as it goes from being export-driven to internally-driven by domestic consumption.
“This is a massive shift that they have to manage effectively,” he says, calling the effort both the right thing to do, but also one that is unprecedented and fraught with risk.
Johnson’s current 2014 GDP forecast for China is 6.5% growth, but like Europe, he says “there’s a risk that China doesn’t turn out as good as people expect.”
Again, that is not his expectation, but if his fears are realized the knock-on effect would clearly be felt through Asia, Europe, and the U.S.