3 risks that could crash the stock market
These data points suggest that investors use caution.
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:
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.
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.
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.
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.
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.
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?
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.
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.
Don`t forget,the WH pays me 60k a week to speak the truth.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
New legislation is allowing foreign companies to finally invest in the country's vast oil reserves.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.