3 risks that could crash the stock market

These data points suggest that investors use caution.

By MSN Money Partner Jan 21, 2014 12:56PM
Image: Arrow Down Umbrella (© Photographers Choice RF/SuperStock)By Jeff Reeves, MarketWatch

After a roaring run for stocks in 2013, there are some signs of trouble on the horizon.


December's job report was ugly. Earnings warnings have picked up. And, of course, there's that pesky problem with the Federal Reserve starting to ease off the gas.


Investors certainly shouldn't panic. And for the record, I remain a long-term bull on the stock market and the American economy in general.


However, it's normal to start wondering if we're poised for a pullback in the next few months.


After all, 2013 was almost nowhere but up. The biggest "correction" for the Standard & Poor's 500 Index ($INX) was a roughly 6 percent slide from May to June. . . and you had to time the volatility perfectly (horribly?) to feel that loss and not get the snapback that followed.


I'm certainly not wishing for a pullback, and I'd love to see stocks power higher in a straight line. Still, I'm keeping an eye on three major areas of concern right now to gauge the state of things. Here they are, and here's what you should look for as signs of a breakdown:


Jobs news

December's report was freakish, with a mere 74,000 jobs added, for the slowest pace of job creation in three years.


This, despite expectations of 196,000 jobs. Equally odd, a separate ADP report coming in at 238,000 jobs to top forecasts and mark the strongest pace in 13 months.


So, one of two things are true. The first scenario is that December's report was an outlier, and we will see a robust January report and big revisions for December.


This is a real possibility, given the "polar vortex" disrupting a lot of jobs and the inherently volatile nature of these labor statistics, particularly amid seasonal hiring around the holidays.


Consider that the latest report added 38,000 more jobs to November’s numbers, an almost 19 percent bump. It's not uncommon for tens of thousands of jobs to be added in the following months as data is refined.


Of course, the second option is that December's jobs numbers weren't a fluke.


It's crucial for the January jobs numbers to improve markedly on December's to maintain the narrative of recovery. But considering Macy's (M) just announced 2,500 layoffs and Dell (DELL) just divulged it's cruising toward massive cuts that may total 30 percent of its workforce. . . well, color me skeptical.


Mark your calendar for Friday, Feb. 7. It's going to be a big day for the markets when January jobs data hits.


Ugly earnings

On jobs: Remember, corporate profits aren't up because of hiring and expansion. They're up because of cost cutting and stock buybacks.


And in 2014, the analyst community seems to think the earnings lift will continue.


The consensus estimate is for double-digit profit growth this year leading to a record earnings per share of $120 for the S&P 500. Some folks are even predicting this is the year revenue trends turn around.


But here's the thing: Wall Street analysts are often wrong, and even more frequently err on the side of optimism. And in the cold light of day, they end up eating crow.


Consider that the number of negative pre-announcements from S&P 500 stocks has hit a record , with almost 20 percent of the components (94 as of this week, according to FactSet) saying as much.


Now consider the big moves from high-fliers that have failed to deliver on profits.


Lululemon (LULU) imploded after warning its fourth-quarter earnings will be bad. The story is the same for stocks like SodaStream (SODA) and Gamestop (GME) and Best Buy (BBY) that posted disappointing outlooks.


The bar is clearly moving down, not up.


Now, a handful of stocks are bad every quarter, and downward revisions are part of the game. The market has managed to hang tough and post a few more record closes in January, despite these earnings concerns.


Heck, the market ran up for all of 2013 amid the same chatter. Profit margins have been at record highs for a while and haven't cracked, so why would they this earnings season? Or the next?


That's the million-dollar question, and a huge risk to watch. If corporate profits remain strong in the face of revenue challenges, or if we see signs of long-awaited revenue growth, then the music keeps playing, and we march ever higher.


But any signs of a breakdown will certainly spark a run for the exits.


Lending drought

Parsing bank earnings specifically from last week, lending rates are a particular area of concern. Wells Fargo (WFC) managed to post an 11 percent jump in profits on cost cutting , but mortgage lending was at the slowest pace in five years . A gut-wrenching 60 percent drop year-over-year for the nation's largest mortgage lender is worth noting.


Another disappointing data point: Consumer credit in November grew by the smallest amount in seven months, with credit-card use in particular slowing sharply.


I'd prefer not to get lost in a philosophical argument about whether debt is "good" or not. But hopefully we can all agree that increased lending is frequently is a sign of economic growth and increased risk appetite. On the other hand, a contraction in lending is a sign of risk aversion and decreased liquidity as banks and debtors alike hunker down.


These are oversimplifications, yes. But broadly, which of those two phases would you like to be in -- credit contraction or credit expansion?


Interest rates are still relatively low, and it's not like we are in a credit freeze. But one of the narratives we were fed last year is that consumers are spending more on cars and houses, fueling economic expansion.


A slowdown in credit would mean the opposite.


It's not just U.S. lending, either, that's worth watching. Consider that despite a number of improvements in Europe across 2013, credit growth remains miserable, or more accurately, it means credit contraction. The finance blog Sober Look has a host of great charts that illustrate this, with loans for both consumers and business at rates not seen since 2009. Are we really to believe Europe is on the rebound when the region is lending and borrowing less then even before the euro debt crisis?


Credit is crucial to so many parts of this recovery, for stocks and the economy.


If reports continue to show slowing lending in the U.S. and around the world, it could get painful for investors.

111Comments
Jan 21, 2014 1:22PM
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All of this conjecture only has value if the data it's based on is reliable and accurate.  And if we've learned anything over the last few years, it's that the data that we're being fed is neither.
Jan 21, 2014 1:43PM
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Our currency doesn't course through Main Street. Too many have too much who don't employ it in the economy. Too many business platforms and virtual companies who wouldn't know enterprise if it was taped to their coke-infested noses. Too much legalese when 10 one-sentence laws lasted Man for thousands of years. Too much number-reliance, not enough reliance on commonsense. No values, no ethics, no character, no care. 
Jan 21, 2014 1:31PM
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I think that we will see an improvement in the U/E rate as over a million people ran out of benefits last month. Certainly see reduced traffic in the little, working class bar I frequent. I don't expect to see a lot of jobs being created for all these people who are now without an income. Without an income I think you will see a contraction on the part of most Americans, leading to poor earnings for the Corporations. Middle America has no money, can't get the economy moving if we don't have money to spend!
Jan 21, 2014 1:38PM
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It's all one big joke and the joke is on us.

Thanks Barry, keep golfing, playing b-ball and smoke some weed.

Oh, and don't forget his son would look like Treyvon Martin and he wouldn't allow him to play football.

 

Everyone else in America gets screwed.

 

Sorry if I sound a tad bitter. I've had it with this economy. So much for living within your means, not running up any debt and live like crap.

 

I guess you could say  I'm not a fan of BHO our wonderful Commander in Chief.

Jan 21, 2014 1:31PM
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what  is  it  these  dopey  "business"  journalists  don't  get?the  economy  will  not  improve until  Obama  is  out  of  Washington.  is it  that  hard  to  understand?


why  is  it  that  difficult   to explain  with  the  new  taxes  with Obama care  with the  new  mortgage  rules  coming  in  2014  with  all  kinds  of  rules  and  regulations  added  over  the  past  5  years  how  can  this  economy  ever  grow?

Jan 21, 2014 2:07PM
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the "beanie baby" mentality in the market has got to end sometime . MANY  companies actual net value , compared to their stock perceived value , isn't even close . Everyone seems to be "betting on the come" , which is just what it sounds like , gambling on "what if" .  What  happened to the original intent of stocks , in being "owners" in a company, and being happy with an 8-10% return each year ? I  think it got lost in the "get rich quick" mentality of today , and the gamblers and day traders have changed it forever . A correction is coming , and it could be a whopper ; no bailouts this time either , whatever happens NEEDS to happen and play out .
Jan 21, 2014 1:37PM
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When we've had a 'leader' who spent all his time and capital on a so called better health care program, and now concentrates on immigration, gay marriage, legalized pot, and income inequality that's shooting up since no jobs have been created, then earnings problems and a lending drought are really quite minor; Jeff Reeves needs to get a clue then quit being the libs' flunkie.
Jan 21, 2014 2:13PM
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Obama has very little input either way about the policies that arguably are destroying the foundation of our economy and the middle class. So the two sides standing back and screaming righteousness from one side to the other are performing a meaningless exercise which only promotes the continued success of a corrupt political institution. In other words both sides are equally stupid.
Jan 21, 2014 1:34PM
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For the past few years the population has been piling up credit card debt because of the slow growth or no growth.  We are finally seeing some breathing room so the people that incurred a lot of debt are not borrowing, instead they are hunkering down, slowly paying off their large bills.  I believe that we will see  an increase in borrowing as that pesky personal debt ceiling is reduced. I also believe that the winter of 2013/14 is causing people to be more frugal in their expenditures.
Jan 21, 2014 2:04PM
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The author is bullish on stocks and the US economy?  Really?  The only reason the dow is not at 5K is because the fed started printing money.  Dont wory, they will not stop.  They cannot.  The US government pays higher interest rates also if rates go up.  Unless taxes go up or benefits go down, we cannot afford higher rates.  Does not really seem like a good time to invest in the stock market to me.  The gdp numbers are not real since the positive gdp is really from printed money, not productive growth. 
Jan 21, 2014 2:27PM
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4 companies quoted as imploding... Those 4 companies are either imploding or declining of their own accord.

Best Buy is a terrible retailer and folks don't shop there.  Service is bad and products are over-priced.

Lululemon is run by a nutcase 

Sodastream is a fad product (not a typo)

Gamestop is declining because more and more folks are downloading games, fewer folks buying used
Jan 21, 2014 2:21PM
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PLEASE LIST THOSE  GREAT ACCOMPLISHMENTS  BRENT      
Jan 21, 2014 3:13PM
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As long as the US has the highest corporate taxes in the world and cheap asian labor exist, jobs will never come back to the US. 

 

In 1971 1 out of 49 americans were on food stamps....today 1 out of 6 are on food stamps.  Is that a sign our economy is recovering?  I think NOT.

 

Remember policitians will always write the laws to benefit themselves and NOT the american people.  They couldn't give a rats a_ss about the american people.

 

 

Jan 21, 2014 3:06PM
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You forgot to mention a Comet colliding with earth - That would cause a Crash also !
Jan 21, 2014 3:25PM
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BRENT

Rumor has it those were guns from   FAST AND FURIOUS        
Jan 21, 2014 4:22PM
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75 in his house......... He's like a mushroom... likes it dark, warm and he eats shlt.
Jan 21, 2014 2:48PM
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Why don't you start with something easy like listing all your split personality names........ make it harder by trying to share them in the order you made them up.
Jan 21, 2014 2:35PM
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I'll try to start it out for you..........

 

1. Obama got a healthcare law passed - (of course it has put more people off insurance than on insurance and is causing his little Dumbocrat friends to disown him)

 

Now you try Beav.

Jan 21, 2014 4:24PM
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Brent 
When  the Fiat market crashes, would you jump out of the window?

TYPO        WALLBANGER
Jan 21, 2014 4:11PM
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BRENT WROTE

Don`t forget,the WH pays me 60k a week to speak the truth.

THEN BUY YOUR OWN ADMISSION YOU ARE A PAID FOR WHORE SOLD TO THE HIGHEST BIDDER  AND A LIAR AS IS YOUR BOSS
""IF YOU LIKE YOUR HEALTH CARE PLAN YOU CAN KEEP YOUR HEALTH CARE PLAN, PERIOD ""
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