(The opinions expressed here are those of the author, a

columnist for Reuters.)

By Mike Dolan

LONDON, Oct 21 (Reuters) - Investors' long-held "fear of

missing out" is now vying with their "fear of wipeout", creating

a peculiar situation in which there are simultaneously anxieties

about all the risks that could upset today's stretched markets,

as well as concerns about pulling back from an equity boom that

could just keep running.

The tension between the two instincts was on full display last

week. The mere suggestion of a credit wobble at U.S. regional

banks sent global equities plunging and volatility spiking, yet

buyers were drawn back within 24 hours.

"Trick or treat?" was the seasonal question Morgan Stanley

posed on Monday, adding that markets may be underestimating the

potential for the cycle to run "hotter" on the back of the

"triple easing" of U.S. monetary, fiscal and regulatory

policies.

Yet it's hard to get a firm consensus about this rally. Is

this a cresting bull market that should make you run for the

hills or just the beginning of a swelling artificial

intelligence mega trend and investment supercycle spurred by

government deregulation?

The tension between the two fears was one of the most

pondered puzzles on the sidelines of the International Monetary

Fund's annual meeting last week.

Credit cracks started to emerge last month with the First

Brands auto parts bust, which then rippled through regional

banks' bad loan flags last week. This could easily be read with

caution as a cyclical or even systemic warning signaling that we

could be nearing the market top.

Or maybe they are isolated events getting more attention

than they deserve simply because markets are so richly priced.

Even though U.S. junk bond credit spreads crept up about 25

basis points over the past month, they're still lower on a

year-over-year basis and 100 bps tighter than April's peaks.

The Federal Reserve appears a touch uncomfortable with all

this.

On the one hand, Chair Jay Powell and crew seem intent on

continuing with interest rate cuts, as they view tightening

money markets as a potential sign of banks hitting their lending

reserve buffers and remain concerned that the current

immigration shock will lead to weaker labor markets over time.

"Something's gotta give - either economic growth softens to

match a soft labor market, or the labor market rebounds to match

stronger economic growth," said dovish Fed board member Chris

Waller last week.

There may be other things that give, of course.

A series of interest rate cuts would come amid the loosest

financial market conditions in almost four years, record high

stock markets and still wafer-thin credit spreads.

If there is a bubble, monetary easing now will only make it

bigger.

Either way, the Fed may get a reality check on Friday if the

delayed release of the September consumer inflation report shows

annual inflation climbing back above 3%.

FOGGY CREDIT

With so many moving parts, two key issues are getting

attention right now from edgy investors.

The first is a long-standing worry about how relatively

opaque private credit markets, which have grown significantly in

recent years, may be masking stress in some areas of the

financial market. There's also concern that the structure of

those credit funds, including their time-limited "maturity

walls," may amplify problems, particularly if many funds get

into trouble at the same time.

Related to this is the worry that banks that have lost

lucrative lending business to private credit have partly made up

for this by investing in those credit funds directly,

meaning they still have exposure to some of the credit risk but

also less visibility about the underlying loans, and thus much

less inclination to stay invested.

Last week's anxiety was amplified by news of a $2.4 billion

investor exit from U.S. high-yield funds in the week to October

15, ostensibly on worries about the First Brands and Tricolor

bankruptcies. That outflow marked the biggest reversal since the

week of the April tariff jolt, according to Morningstar's

Pitchbook.

JPMorgan boss Jamie Dimon's recent "cockroaches" comment -

the idea that when you see one credit problem, there are

probably many others - won't have helped.

But, if there's so much hand-wringing, why have markets

bounced back so quickly?

At a most basic level, there's still no real sign of a

slowdown in U.S. economic growth, though the lack of economic

data updates might be masking some of that.

In the absence of those updates, corporate reports are

taking on greater heft as investors try to make sense of what's

happening in the economy at large. And the early stages of the

earnings season seem fine thus far, with the AI theme still

on the boil and big banks pulling in healthy fees from the

pickup in mergers and acquisitions activity.

But the biggest tailwind may be President Donald Trump's

deregulation push and industrial priorities. Knowing how much is

in the pipeline may be preventing many investors from throwing

in the towel on this equity rally.

Jefferies, itself caught up in the First Brands bust, says

the return of big government and industrial policy is the real

mega trend that has been accelerated by Trump's return to the

White House.

The banks' strategists cite the corporate "re-shoring" of

the rare earth, pharma, chips, steel and shipbuilding

industries; the U.S. government taking direct stakes in key

firms and AI funds; and JPMorgan's "Security and Resilience"

plan for $1.5 trillion of effectively "America First" lending

over the next decade.

The market jitters are real, but it's just hard to jump off

when you see that coming down the pike.

The opinions expressed here are those of the author, a

columnist for Reuters

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