Wall Street's 'Bliss' Trade: Is the Stock Market a One-Way Bet?

Wall Street is having one heck of a run this year and Australians are benefiting via their superannuation.

Earlier this year the S&P 500 surpassed 7,600 for the first time.

A decade ago the all-time high was 2,100. Five years ago it was about 4,200.

Australia's share market has also had an impressive run, notwithstanding some recent weakness.

One US academic has suggested Wall Street and, indeed, global share markets have found "bliss", or a never-ending run of gains.

The bliss (big lasting state support) trade is the idea that governments and central banks are loathe to let big companies fail due to the financial stress it brings into the monetary system.

The stock market crash of 1929 led to the Great Depression.

The stock market crash of 1987, and the subsequent policy response, contributed to the 1992 Australian recession.

A stock market collapse can be lethal for the economy.

If the bliss concept holds true, it would push the stock market into the category of a one-way bet or, at the very least, end the risk of a share market "crash".

But is that nonsense?

Moral hazard

There's a basic idea with any investment: the higher the risk the greater the reward.

That concept was fractured during the global financial crisis because some of the big Wall Street investment banks were rescued by the US government.

The Troubled Asset Relief Program (TARP) was designed to support big banks that had taken on worthless assets and then run into trouble.

While Lehman Brothers was allowed to collapse, it led to an idea that some big banks or financial institution were simply too big to fail.

It created a moral hazard for company executives, who could become inclined to taking big risks in the knowledge that if they suffered massive losses they would be rescued by the government.

Gemma Dale, director of nabtrade, says the investment hubris that comes with this has existed for decades.

"There was the Greenspan put, there was a lot of confidence that monetary policy existed to support any kind of volatility where there was meaningful risk to the downside," she said.

"And that was a wonderful thing to know as an investor and a trader. The amount of fiscal support that has been provided to the economy, GFC and post has been simply astonishing."

Now, some analysts argue, governments and central banks (via money printing) again stand ready to support big companies if they run into financial trouble.

"I think that is problematic to the extent that you've almost removed [the idea of] moral hazard. And that's an issue," Dale said.

Put another way, she believes there's a distinct lack of morals among US corporations at present.

Moral hazard was once something to be avoided. Now that fear seems to have been replaced with an acceptance that immorality is embraced.

Mega IPOs

This reckless, caution-to-the-wind investing style has, some could argue, helped SpaceX launch onto the stock market as a record-breaking initial public offering.

The argument has been that Musk's future plans for the company are nothing short of fantasy and, despite solid revenue growth, the tech giant is not in a position to produce a profit anytime soon.

Its listing price was $US135, but Morningstar values the company at around half that price.

Other blockbuster IPOs are likely to follow, and the size of companies like Amazon, Meta, Alphabet and Nvidia continue to grow exponentially.

"These are very highly profitable companies, but they are ploughing all of their cash into the next big thing," Dale said.

"And the question is whether or not they can make it work."

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As for investors, whether they can make it work seems to be a side issue.

This week, for example, despite concerns about a lasting Iran war ceasefire and the threat of rising US interest rates, billions of dollars poured into semiconductor stocks.

And based on what?

"A huge swing in semiconductor sentiment lifted US markets in overnight trading," Moomoo Australia's Michael McCarthy wrote.

"The rally was based on the flimsiest of news flow and narrowly focused on chip hardware manufacturers."

It seems the moral hazard of knowing governments are there to underwrite the stock market means even the flimsiest piece of news can lead to a sudden rush of billions of dollars into the market.

The trillion-dollar question

It all begs the question: are share markets now a one-way bet?

At the very least, given the support for big stocks in the market, can we now rule out the possibility of a stock market crash or a disastrous slump of between 40 to 50 per cent in the market?

The last time the US stock market fell by more than 50 per cent was during the global financial crisis.

"If you listen to [American billionaire investor and founder of Bridgewater Associates] Ray Dalio, he is telling you that, effectively, the US is broke and things are going to go very badly wrong at some point," Dale said.

"It is inevitable. The timing is very hard to pick."

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This is the idea that the US government is not currently in a position, or lacks the fiscal fire power, to rescue big Wall Street banks at present if they do run into financial trouble.

Indeed, the weaker US bond market has been something of an alarm bell in this regard in recent months.

The US 10-year Treasury bond yield was trading at a two-year high of 4.6 per cent earlier this year. Any yield approaching 5 per cent for the 10-year bond is considered alarming.

Bond yields rise when bonds are sold off because investors demand compensation for the higher risk of default.

Donald Trump said the bond market got "yippy" — jittery — when he announced his so-called reciprocal tariffs in April 2025.

Rising yields or interest rates can be devastating for stock valuations.

But there is another potential cause for concern.

The moral hazard behind the big stock market gains is pushing many firms into indexes that are followed by managed funds.

Once they're in the index, fund managers who follow the index buy them up.

You can see how this could feed on itself.

Conversely, Dale warns, if an economic shock hits the market that removes several big companies from any index, that is when you might see a share market collapse.

"If people start to withdraw at some point, then you get the alternative spiral," she said.

"It goes the other way, so this idea that we can never see a meaningful downturn, I think, is risky.

"But we've all been wrong about that for quite a while."

And many of our superannuation balances are showing the spoils of this.