The mean reversion argument
All good things must come to an end, including bull markets. This late in the game, it seems like a good guess that markets are headed down from here, simply because they have gone so far up in what seems to be a pretty tepid period of economic growth.
The self-fulfilling prophecy
Some investors are tilting more toward the “fear” side of the scale than the “greed” side. Flows into passively-managed ETFs have been massive, propping up markets based on demand rather than fundamentals. A few months of well-publicized outflows could trigger a rush to the exit, with investors fearing the next correction and pulling out massive amounts of money from the market (therefore causing the correction they fear).
The Trump reversal
When President Trump was elected in November 2016, the market rallied higher in what was dubbed the “Trump trade.” This was especially evident in US small-cap stocks, which were presumed to be the beneficiaries of more protectionist, pro-business policies. Nearly a year into his presidency, meaningful reforms have not been made in health care or taxes – indeed, health care reform looks unlikely given the failure of both “repeal and replace” and “repeal only” plans in Congress. Similarly, no real progress has been made on infrastructure. The beneficial effects of these reforms have already been priced into stock valuations, so a lack of reform indicates lower valuations (and lower stock prices).
The Central Bank blame game
Retirees need income. For years, the favored back-of-the-envelope calculation for retirement savings was to have 25 years of projected monthly expenses saved for retirement, earn 4% on that principal amount through retirement, and never run out of money (aka the Multiply by 25 Rule and the 4% Rule). Low global interest rates pushed income seekers into the market, bidding up the prices of income-producing assets. The same was true of savers who wanted to earn more than a token interest rate in their savings accounts. The stock market was a good choice for these investors given the ease of access, capital appreciation, dividend payments, and low up-front costs to invest. If interest rates rise, does this money flow back out of the stock market and into safer investments, leading to a market decline?
The calm before the storm
The volatility index (VIX) is commonly called the “fear index.” Why is a low reading on the fear index bad? A low reading often signals complacency and a high reading generally signals panic. Volatility historically has gone through periods where it was low for a long time before jumping up in a sharp correction. The fact that fear is low is not in itself a bad thing – but it can always go higher.