Critical Threats To 2017's Bull Market - Part 2: Over-hyped Risks?

With The Donald J. Industrial Average surpassing new record highs every day, questioning this bull market"s continued existence remains heresy outside of dark little corners of the internet.

However, continuing his series, Bloomberg"s macro strategist Mark Cudmore dares to mention a few of the more prescient "known unknowns" that could hamper the meltup for the rest of the year... and in the case of today, some that may not.

Via Bloomberg,

Overhyped market risks provide just as many trading opportunities as genuine ones. It’s crucial to delineate what matters and when.

Yesterday’s piece highlighted threats that could cause a material correction before year-end.

Today’s column argues that other oft-cited concerns can be safely ignored for the moment.

Nafta is prominent in the news and any move by President Donald Trump to abandon talks and exit the deal would have global repercussions. Still, that worst-case scenario won’t be a 2017 issue. Even if Trump jumps, he has to give six months notice and Congress will fight to keep the U.S. in.

Will China increase its deleveraging focus after the Communist Party Congress? Probably, and that may hit domestic financial assets. But officials will not want to significantly hurt the real economy and have an impressive track record of slowing growth without killing it. That reduces the risk of a spillover into world markets.

Global yields breaking higher would have major consequences. With only two months of data to go before year-end, are investors suddenly going to believe in runaway inflation though? Given the skepticism shown by the flattening U.S. curve, a one-off print will be insufficient. There’ll need to be a significant change in the trend and there’s simply not enough time left for that in 2017.

Brexit? With expectations so depressed and in the context of a two-year process, it’s not a major near-term risk. It’s a U.K.-asset story, with minimal contagion elsewhere.

Tax reform failure? It seems unfeasible for this to be resolved either way in 2017 and expectations -- at least in the market -- for a successful passage aren’t high in any case.

A Kurdistan-prompted oil shock? The region just doesn’t provide enough supply to be a game-changer -- not with U.S. shale producers ready to ramp up production whenever prices rise.

A failure to form a German majority coalition? Like Brexit, it’s a regional story. A negative that may be underpriced in local assets but not something global investors will panic about.

So, says Cudmore, excluding a Black Swan event, only North Korea, Catalonia or a U.S. government shutdown have the ability to cause a 10%+ correction in the MSCI All-Country World Index by Dec. 31... and here"s why...

Wall Street Strategists Forecast Most-Bearish Second Half Since 1999

Despite a hiccup in the last week or so, global stocks survived as the best-performing asset class of the year (with the MSCI All-Country World Index wrapping up its best first half in 19 years)...

But, as Bloomberg reports, Wall Street strategists are fighting historic odds when urging investors not to chase the rally in the U.S. stock market.

They’re predicting the S&P 500 Index will see momentum fade in the second half after shares climbed 8.2 percent for the best first-half performance since 2013.

The average year-end prediction, 2,439, represents a 0.6 percent increase by December, the least bullish forecast at this time of year since 1999, data compiled by Bloomberg show.

Among the 20 strategists surveyed by Bloomberg, stretched valuations and decelerating profit growth are often cited as reasons for caution. Yet stocks have shrugged off everything from monetary tightening to oil’s slump to drama at the White House, surging past Wall Street forecasts that at the start of the year were the least bullish in more than a decade.

Of course there are always those who remain serial extrapolators...

Laszlo Birinyi, a steadfast bull during the eight-year equity rally, said the prevailing caution among strategists is one reason why he’s optimistic. The president of Birinyi Associates Inc. recently said his firm would buy calls betting on the S&P 500 to reach 2,500 by September.

“Wall Street continues to be unenthusiastic regarding the market,” Birinyi wrote to his clients this week. “New highs are generally greeted with a yawn. Especially encouraging is the fact that investors have cash,” he said. “As the year proceeds, we are actually feeling better about the market.”

Others are sticking to bearish calls.

Tom Lee, Fundstrat Global Advisors co-founder who’s the most bearish with a prediction of 2,275, last week slashed his S&P 500 earnings forecasts for this year and next, citing weaker inflation, rising labor costs and a delay in President Trump’s growth agenda.

And while VIX just had its biggest intraday surge since last year’s Brexit vote result, it just posted its second quarterly decline, with a 7.5% drop. The VIX came within 5% of its record low earlier in June and averaged 11.4 in the past three months, the lowest quarterly average since 2006.

And it is not just US equities that are concerning, the cost to hedge against European stock swings just saw its biggest monthly surge since January 2016.

The VStoxx Index jumped 21 percent in June, reaching its highest level since before the French election in April. The Euro Stoxx 50 Index is poised for a quarterly decline on growing speculation the region’s central banks will tighten policy -- something that would likely trigger market turmoil in the medium term, JPMorgan said.

Of course Wall Street strategists aren"t alone in their skepticism of US equity exuberance...

"Transitory"