Given the magnitude of global financial markets, the wild rise and fall in prices of stocks like GameStop so far has been limited in scope, and there are few signs of broader disruption.
What could derail the stock market? Many things, of course, including the possibility of opaque, systemic connections between hedge funds that have lost money in the short squeeze and sensitive global financial institutions. The collapse of one money-losing hedge fund — Long Term Capital Management in Greenwich, Conn. — sent unexpected tremors through global markets back in 1998. But that is exactly the kind of thing that regulators will be looking for now.
There has been a flood of initial public offerings, particularly of entities known as SPACs, short for special purpose acquisition companies; my colleague Michael J. de la Merced has described them as “publicly traded shell companies created solely to merge with a privately held business.” Many such companies have traded without earnings or revenues, another indication that a deluge of easy money has led to speculative pockets in the stock market, which could lead to serious trouble.
In the meantime, the long overall rally continues. It began in March when the Federal Reserve and other central banks began a rescue operation, vastly increasing the global money supply and pledging to do whatever it took to maintain financial stability in the face of the economic downturn driven by the pandemic. Fiscal stimulus — big government spending programs — has made up for some of the income of millions of unemployed people and thousands of failing businesses. In the United States, if the Biden administration has its way, more government aid is on the way.
Thanks in no small part to the infusion of money, asset prices across the board have risen, and interest rates remain extraordinarily low. Big tech stocks like Apple, Microsoft and Facebook, which all reported earnings in the last several days, have fueled the rally, helping to make stocks expensive by historical measures. But if corporate earnings rise as expected — Mr. Bernstein anticipates a year-over-year increase that could be 40 percent or more, given the devastation wreaked by the pandemic in 2020 — the stock market may seem less outrageously priced.
Low interest rates make stocks attractive compared with alternatives like bonds, many strategists say, but that could change. Katie Nixon, chief investment officer of Northern Trust Wealth Management in Chicago, said that she expected the bull market to live on, but that if the yield on the benchmark 10-year Treasury note, now a little above 1 percent, reached 1.5 percent or even 1.75 percent, there could be a severe stock market reaction, much as there was in 2013 and again in 2016.
Such a rise is unlikely but possible, because government statistics are likely to show an apparent spike in inflation in coming months — in large part because the severe economic downturn of 2020 held prices down.