The S&P 500, Dow Jones Industrial Average, and Nasdaq have all quietly notched fresh all-time highs in the summer of 2016.

After an extremely shaky start to the year, US equity markets have proven resilient in the face of falling energy prices, stagnant global growth, and the somewhat surprising move by Britain to exit the European Union.

With interest rates in the United States still near historic lows, there is certainly some basis for the rise in value of riskier assets. Investors have been driven away from more traditional/conservative investments as they seek a reasonable return on their capital.

The current rally in US equities that sprung from the ashes of the Financial Crisis has now established itself as the second longest in history (the longest being 1987-2000).

Looking forward, it's nearly impossible to forecast when the current paradigm will end. Problems outside the United States in Europe and Asia have set the stage for the world's first negative interest rates. Somewhat slow growth in the United States has also caused the Federal Reserve to raise interest rates at a snail's pace.

The fact is the Fed's hands are somewhat tied because increasing rates at home while foreign governments are dropping theirs would inflate the value of the dollar even more and put added pressure on America's ability to export goods at a reasonable price.

Dropping energy prices, particularly crude oil, had been the only kryptonite to this otherwise Super Market. And with OPEC considering another round of talks in September (focusing on a potential freeze in production), one wonders if a floor in crude hasn't been established in the near-term.

The US presidential election will of course be another factor to consider this Fall, but with current estimates showing Hillary Clinton well ahead of Donald Trump, one wonders if this event will cause even less volatility in world markets than "Brexit."

One important factor to be on the lookout for would be the return of inflation in the United States, which has been at near-anemic levels for a long time now. If prices start rising, the US economy could heat up quickly and pull the rest of the world out of recession - much like China did after 2008-2009.

Under that scenario the Federal Reserve might start raising rates a little faster than currently anticipated, which could have a ripple effect across asset classes.

In a market like this, one of the greatest pitfalls can be complacency.

Prudent portfolio management is a 24-7 job - even when it feels like the current regime will last forever.

Because it definitely won’t.

All good things eventually come to an end.

 


Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.