Recently, hype and headlines have been focused on the stock market reaching new all-time highs. This warrants at least a brief review of the last two years, suggests Jim Stack, a "safety-first" money manager and editor of InvesTech Research.

Despite the strong stock market performance over the past 15 months since the bear market bottom, the siblings of the Dow Jones Industrial Average (DJIA) — the Dow Jones Transportation Average (DJTA) and the Dow Jones Utility Average (DJUA) — have not reached new highs, and in fact, the DJUA is within striking distance of its multi-year low.

This is important because transports are typically more economically sensitive, while utilities are a bellwether — often leading major downturns in the market. Note that divergences between the overall DJIA and its utility and transportation counterparts have frequently occurred at major market tops in the past.

Meanwhile, the premier, small-cap Russell 2000 has barely erased half of its losses and remains 20% off its high. While the Russell 2000 Index is typically one of the strongest indexes coming out of a bear market bottom, it is currently bouncing along at the same level it was two years ago.

What could go wrong? There are still a number of major systemic risks that keep us up at night. Leading these is the housing market, which remains one of the largest potential dangers today. Adding to potential systemic risks is the unwinding of the commercial real estate market, which could have far-reaching effects on the broader economy.

Not only is commercial real estate teetering on the verge of trouble, but consumers are experiencing growing credit weakness as well. Credit card debt recently hit a record high of $1.13 trillion, an increase of 32% over the past two years.

As headlines abound over new all-time highs in the S&P 500, it is important to keep both the “downs” of 2022 and the “ups” of 2023 in perspective. While there is increasing evidence of a potential soft landing, the chances of achieving this much-anticipated Goldilocks scenario are inherently difficult. Unfortunately, the Fed has a dismal track record of success. Of the 12 prior Fed tightening cycles, only 2 had soft landings, while 10 led to recessions.

Yes, the Fed just may (emphasis on “may”) pull off a soft landing if consumer  confidence holds firm... if new recession warning flags remain subdued or absent... and if the “stickiness” of inflation starts to soften. But this potentially good news is not without an unusual or even unprecedented list of systemic risks — any of which could trigger a very hard landing and recession.

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