Not a lock
Of course, the news could be significantly more negative than this. And enough negative views could convince the market that the shorts and bears are right, and produce a downturn in coming months rather than an extension of the rally.
What could go wrong?
- We could see a renewed crisis in Greece, because that government has so far been unable to persuade the inspectors from the troika -- the International Monetary Fund, the European Commission and the European Central Bank -- to authorize the next payment in the Greek bailout package. The Greek government says it can squeak by until November, but a major part of the money was earmarked to prop up Greek banks. A loss of confidence in the Greek banking system (or let's say a further loss of confidence) could send this all out of control.
- Right now, the markets seem to be assuming that after the U.S. election all the parties will sit down and work out a way to avoid sending the U.S. off the fiscal cliff in January, when automatic budget cuts and the expiration of the Bush administration tax cuts could threaten to stall the economy. Politicians? Rational discussions? A compromise solution? How likely is that? If the elections in November embolden or weaken one party significantly, someone may start grandstanding in a way and on a schedule that freaks out the market.
- Spain could wind up in chaos if the government of Mariano Rajoy keeps refusing to request a bond-buying program and the regional governments rise up and refuse to cut their debts.
- The October transition to a new set of leaders in Beijing could produce enough publicly visible infighting to rattle the Chinese -- and thus global -- financial markets.
Color me cautiously optimistic
I've probably missed a few pluses and minuses, but you get the thrust of my argument, I hope: The odds favor a continuation of this rally but not overwhelmingly so. You certainly want to give your portfolio a chance to participate in any upside, but I don't think this is the time to pile on risk in the U.S. markets. Dividend-paying stocks in general, and in the energy field in particular, look attractive. Sectors that would appreciate with a good retail season (trucking, for example) but that haven't appreciated wildly look attractive. Sectors that might be able to score gains even if the general economy doesn't turn in better-than-expected growth -- such as housing -- deserve a dollar or two.
A last reason to be cautious on U.S. stocks is the very real possibility that Chinese and other emerging-market stocks could wind up outperforming U.S stocks if the global economy breaks as positively in the remainder of 2012 as it could. Chinese stocks are cheaper than U.S. stocks right now and are nowhere near a high. If traders go for the risk-on trade in the next few months because the U.S. economy looks stronger and the eurozone looks more stable, Chinese stocks might reap a bigger benefit than their U.S. counterparts do.
Please note that nothing in this column or in these scenarios imagines that the market will rise on fundamentals. The best that I can say is that the rest of 2012 will look better than current low expectations. I'm talking sentiment and cash flows, not growth of earnings and gross domestic product.
And nothing in my scenario suggests that the global economy won't have to pay the piper sometime down the road. We've witnessed a huge expansion of global credit and global money supply as central banks have struggled with the Great Recession. The global financial system still faces the challenge of coping with the reversal of those balance sheets and the turmoil that will come with a need to continue a deleveraging that hasn't progressed very far outside the United States.
At some point, kicking the can down the road just won't be an option.
Updates to Jubak's Picks
These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:
- 2 options for Spanish bank stocks
- Can emerging markets benefit from stimulus?
- Brazilian utility stocks fall on policy changes
- Should you buy on Nokia's drop?
- Lynas soars on project green light
- A smart stock for the global water business
- Iron ore plunge hurts small miners
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
Click here to find Jubak's most recent articles, blog posts and stock picks.
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