The Wall of Worry

We are sure many of you are familiar with the stock market concept of the “wall of worry.”

For those of you who are not – the idea is that the stock market climbs higher as investors exhibit concerns and skepticism. Those "worries" provide continual incremental buying patterns as investors must adjust to continued good results.

We often talk about this concept in terms of the “potential” in stock prices. When you have many investors sitting on the sideline because of their concerns, that can create future buyers.

Recently, we read an article from our old friend Doug Kass of hedge fund Seabreeze Partners and the publication theStreet.com. In the article, he did a great job of going through the current concerns of skeptics about this BULL market.

The article is behind a paywall, but we will still provide a link here…

Doug has some very valid points, which are indeed where investors are focused. We decided to go through them briefly with our take.

1. Interest rates will likely be higher for longer.

Many investors have been surprised that longer-term interest rates (like the benchmark 10-year) have gone higher after the Federal Reserve recently cut rates. We are not.

We also think most sophisticated investors understand the relationship between short-term rates (which the Fed cut) and longer rates.

Here is the chart of the 10-year rates over the last five years

On the chart, you can see how they have traded higher.

There is something else to notice on the chart – rates are also back to where they were a year ago. They are also not too far from their initial peak back in 2022.

Rates are higher than two months ago but not higher than in recent years. They are also not high on an absolute basis compared to the 1980s and 1990s when they averaged high single digits.

For "higher rates" to REALLY impact the stock market, we would want to see them at least several percent higher. A minimum of 6% or greater and even then, we are not sure it would have much of an impact.

2. Inflation will likely remain sticky.

This is a somewhat similar situation to interest rates. They have ticked up a small amount from recent lows.

Here is the monthly chart of the year-over-year change in the Consumer Price Index going back to 2002…

You can see a slight increase to 2.6% at the end of the chart.

This is still technically above the Fed's target 2% rate, but not by much. It is also down massively from where it has been in the last several years.

Finally, you can see that throughout the early 2000s, it averaged closer to 3%.

We don't think that "sticky" inflation of around 3% will have any impact on the stock market either.

3. Sluggish global economic growth with persistent inflation means that the era of "slugflation" has likely begun. 

The Q3 2024 Global Domestic Production (GDP) for the United States came in at +2.8%, and here is a chart of how it has been pacing the last few years…

This looks solid to us. Eventually, we will see a slowdown and a recession, but this is not happening right now.

With US GDP growth HIGHER than inflation, we struggle to understand how we are in a “slugfation” environment.

4. Reduced corporate profit expectations.

This is true, but not by much, and not recently. Here is a chart tracking the "bottoms up" data for the earnings per share or "EPS" of all the companies in the S&P 500 from FactSet…

The number for 2025 had moved from around $280 to about $275 today, or a roughly -1.5% negative revision. Look closely at the chart, though; you can see it has begun to move higher again.

At some point, large negative earnings revisions could/would take down the overall stock market, but we don't think this is anywhere enough.

5. Elevated valuations.

We can’t argue with this one at all. We are sure you have seen many charts explaining the record or near-record valuations for the overall stock market.

We will point out that the stock market has not EVER gone down because it was expensive. It only goes down when EARNINGS GO DOWN.

Until we can see that happening – and hard to do with almost +3% GDP growth, stable interest rates, and stable inflation – we don't think valuation will matter.

6. Bullish investor sentiment (and positioning).

Another one where it is higher than it was a few weeks ago but not high at all relative to recent or historical highs.

We have found the CNN Fear and Greed Index to be a good proxy for overall sentiment. Here is the most recent reading…

It's elevated, but nowhere near the highs, we pointed out multiple times earlier this year. At these levels, we are not concerned.

7. Feckless monetary and fiscal policies (leading to ever-higher deficits and unprecedented national debt loads).

This is one of the most popular of the concerns out there.

It is also a concern where the EXACT same comment could be made for most of the last two decades, two decades that have seen one of the greatest BULL markets in the US stock market history.

This WILL matter at some point, but we are going to wait until it manifests itself and not try to predict something that could take many years or even decades to play out.

We think Doug Kass is one of the best out there. Over time, he has had some great calls and continues to have great insight.

We understand his concerns about the current stock market, and they are very valid.

We don't think they are going to have any significant impact in the near term, especially in the next six weeks.

We think understanding them and how they might eventually play out is essential for your investment portfolio, but – for now – the BULL market remains intact!