Stock markets pride themselves on not panicking, right up until the second they do. At the moment, big investors are still betting that the Persian Gulf troubles will pass, that the global economy will right itself and that share prices will enjoy decent gains over the remainder of this year.<\/p>\n
Let us hope that comes to pass. Don\u2019t be surprised, though, if the mood takes some rapid turns in the days ahead.<\/p>\n
A note this week from Scott Chronert, a widely followed strategist at Citigroup, summed up the rather fluid state of current thinking. The note began by reaffirming Citi\u2019s belief that the S&P 500 will rise from its current level around 6,600 and finish 2026 around 7,700, delivering yet another year of big gains for patient investors. <\/p>\n
\u201cThere are no changes to our base case at this point,\u201d Mr. Chronert wrote. \u201cHowever, the duration of the Iran conflict and private-credit uncertainty, along with AI disruption and funding concerns, present tail risks that cannot be ignored.\u201d<\/p>\n
Exactly. To put that another way, the living room is looking absolutely dandy \u2013 if you ignore the smoke billowing from under the door. <\/p>\n
Why investors should avoid looking for a market bottom in wartime<\/a><\/p>\n What is generating the smoke? Much of it comes from the growing mess in the Gulf. Futures markets are now betting that what was initially supposed to be a short-term bump in oil prices could stretch for months and send energy prices to painful heights.<\/p>\n The conspicuous shortage of adults in the White House raises fears that more surprises could be in store. It still seems nearly unbelievable that the world\u2019s most powerful country could have stumbled into a conflict with no well-defined objective and no obvious way out. But then again, if you watched U.S. President Donald Trump cracking Pearl Harbor jokes in front of the Japanese Prime Minister this week, it\u2019s obvious that foresight and diplomacy don\u2019t count for much in today\u2019s Washington.<\/p>\n One key question is whether shock waves from the Gulf could destabilize other parts of the financial pyramid. As Mr. Chronert mentioned, private credit is already making many smart observers nervous. In fact, so many investors are trying to get their money out of the sector that prominent asset managers, including Morgan Stanley and BlackRock Inc., have been forced to limit withdrawals.<\/p>\n Why are people headed for the exit? The private-credit sector consists of money managers that aren\u2019t banks, but which act like banks and make loans directly, typically to smaller companies. <\/p>\n Until a year or so ago, this strategy sounded like an eminently reasonable way to juice returns. However, it now seems that private credit might not be quite the low-risk alternative that many investors had assumed. <\/p>\n Give peace \u2013 and bonds \u2013 a chance<\/a><\/p>\n Among other things, the bankruptcy this past September of Cleveland-based auto parts maker First Brands Group demonstrated that lending standards in the sector are not always as high as advertised. First Brands had thrived by making one acquisition after another, most of it financed by generous dollops of private credit. Then it ran into trouble and lenders were shocked to discover just how much debt it had taken on.<\/p>\n Even more disturbing is the growing realization that private credit has a lot of money tied up in loans to the software sector. If artificial intelligence<\/a> undercuts those software businesses, as many people expect, private-credit lenders could take a sizable hit.<\/p>\n To be sure, private-credit defaults are still relatively rare and returns up until now have been solid. So maybe the sector\u2019s issues will blow over. But its recent woes provide just one example of how AI is shaking up many market assumptions.<\/p>\n The emerging technology is fascinating and seductive. To carve out a piece of it, tech giants such as Alphabet Inc., Amazon.com Inc., Meta Platforms Inc. and Microsoft Corp. are estimated to be investing US$660-billion this year. That is an absolutely massive amount of money, and it is still not clear if it can be justified.<\/p>\n