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Why the stock-market rally may be entering the anxiety-driven stage

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Fear of missing out might be running strong this time of year.

The stock market on Tuesday ended the dreaded month of October not only unscathed but at or near record highs, which means the biggest risk for money managers might just be the threat of missing out on the 2017 rally. For institutional investors, “missing the upside…could anger boards and trustees,” wrote Charles Dumas, chief economist at Lombard Street Research, in a note titled, “S&P 3,000?—a big upside for the big ‘risk.’” “On my two-week trip through Korea, China, and the U.S. West and East Coasts, I found little resistance to the notion that the chief risk in today’s markets is missing what remains of the cyclical upside,” he said. He argued that underlying global fundamentals remain strong, with the world economy being pulled by three locomotives—the U.S., Europe and China—for the first time this century. Second, plenty of commentators remain defensive, with reasons for a potential selloff “still commonly advanced,” which indicates that buying power on the sidelines remain. Finally, central banks’ desire to push stubbornly low inflation rates to 2% mean they’re unlikely to be as hawkish as investors expect, despite the fear that overly loose policy for too long could create a bubble. “It all suggests the era of too much [monetary stimulus] too late is not yet past,” he said. “So the big risk is a new bubble, not a near-term bear market. And then there are U.S. tax cuts to consider,” he wrote.
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