6 reasons it's an unfriendly world for stocks

Between the crisis in Crimea, an apparent slowdown in China and a looming end to loose-money policies around the globe, it's shaping up to be a rocky patch for equities.

By MSN Money Partner Mar 14, 2014 2:02PM

The Wall St. Journal on MSN MoneySupporters of Ukraine yell at pro-Russian protesters during a rally in support of the keeping Crimea a part of the Ukraine on March 10, 2014 in Simferopol, Ukraine. (c) Spencer Platt/Getty ImagesBy Alen Mattich, The Wall Street Journal


It's shaping up as a really rocky patch for the equity markets.


The crisis in Crimea doesn't look set to go away anytime soon. There's ever more evidence of China's slowdown. Ultra-accommodative developed market monetary policy looks to be approaching its sell-by date.


U.S. earnings growth looks to have peaked. Valuation multiples look particularly rich. And it's been a long time since the markets suffered anything approaching a typical correction.


Taking each point in order:


1. Not only is it growing likely that Russia will annex Crimea, but Russian President Vladimir Putin seems to have his eyes on eastern Ukraine, with its large ethnic Russian population. Western intervention will be limited by German and eastern and central Europe's dependence on Russian gas.


What's more, Russia is no longer the superpower it once was. Though this will remain a regional conflict, it has increased market uncertainty and therefore lifted the risk premium investors demand for holding assets.


2. China is more important than Russia. Chinese demand has been a major driver of commodity prices, of investment in commodity-producing countries, of demand for components from regional suppliers and, increasingly, of luxury goods from high-end western manufacturers. And China is slowing.


Fixed-asset investment growth, industrial production growth and retail sales growth have all been slowing. The price of industrial metals like copper and iron ore has collapsed, and China's purchasing managers surveys have been worrying. This has fed through to signs of corporate distress, including default and raised concerns about a crisis among China's shadow banks. Spillover would undoubtedly have significant effects in developed markets.


3. Notwithstanding geopolitical developments, the U.S. Federal Reserve is determined to reduce the pace of its asset purchases with a view to ending them in the second half of this year. And despite still above-trend unemployment, a pickup in wage growth could worry the Fed enough to start tightening policy sooner rather than later.


The U.K. faces similar dynamics, with strong growth and rampant house price inflation raising questions about how long the Bank of England might be able to sustain near zero interest rates.


In the eurozone, despite talk of the European Central Bank launching its own quantitative easing program, there is reason to be skeptical -- it could be politically dangerous. Yet with credit shrinking the eurozone economy continues to struggle and faces outright deflation.


In Japan there are growing doubts about how successful Abenomics is proving to be. Prime Minister Abe suggested the Bank of Japan could double its QE program. Whether it works any better in the future than it has done hitherto is something else entirely.


What's more, New Zealand already started to tighten policy this week, the first developed economy to do so this cycle.


4. U.S. corporate earnings growth seems to be slowing sharply. And as the labor market tightens further, the balance between profits and wages is likely to tilt more towards the latter and away from historically high levels of profitability as a proportion of the total economy. Which would make sense, corporate margins tend to be mean-reverting and they've been unusually high for some time.


5. Equities are expensive, particularly U.S. shares. Economist Robert Shiller's cyclically adjusted price-to-earnings ratio for U.S. shares show they're trading on more than 25 times earnings. That's approaching peaks hit before the financial crisis, is some 50 percent above a long-run average of around 15 times and is around levels that preceded market busts, excluding during the tech and telecom bubble.


European equities are less richly priced, but they've also moved ahead sharply since their 2009 lows. Germany's index recently hit all-time highs while the U.K.'s FTSE 100 is not far short of them.


6. Markets tend to correct, even during bull runs. Except lately, the "corrections" have been at most dips of a couple of percentage points before buyer euphoria sent prices racing ahead again.


Fund manager John Hussman has written about these cycles of ever shallower retracements before new highs are hit as symptomatic of market mania rather than rational investor buying on fundamentals. He forecasts "zero or negative nominal returns on every horizon of less than 7 years."


More from The Wall Street Journal


Tags: SPY
36Comments
Mar 14, 2014 2:51PM
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 Lowest Labor Participation Rate Since 1978. Wall Street on Welfare. Obozo's 7 trillion of debt bought not one single job. 100 Trillion of unfunded socialist programs coming due. This is what change looks like.
Mar 14, 2014 2:30PM
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You want to know the real reason why its an "unfriendly world" for stocks. Simple. Wall Street long ago wore out its welcome.
Mar 14, 2014 2:32PM
Mar 14, 2014 5:56PM
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WALL STREET:


I keep hearing people telling me how great Wall Street has been to them. One person says

"his Stocks Has Risen 60 and even 70 percent" some even claiming  120%..


Did You Sell Any of Those Stocks??? Did You Make Any Money..


The only people who have made money in this market are the COE's and the Executives on the boards who SOLD STOCK ... By the thousands of shares given to them for signing bonuses when they were hired..


YOU , You're setting on a stock that will take 25 years to get your investment out of...

If any at all.....

So tell me when you sell it and you're not just "Holding a Worthless Piece of Paper"

And I'm talking about all you people out there who are holding this over priced Stock

that you've bought in the past 3 years... and I'm taking to the "Average Joe" not some day trader..

A man working for Ford's with hopes of retiring.. or a nurse or a lab tec.. Let Me Know when you sell

Mar 14, 2014 6:02PM
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But yesterday they said there were five reasons why this wasn't a market bubble.  I'm so confused!


I think a nutless monkey could write finance articles.

Mar 14, 2014 5:46PM
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Everybody wants to blame somebody:       


MSNBC has always been pro Wall Street

The fact of the matter is "Wall Street Is Over Valued"


INFLATION boys,,,, There's no one to blame but Government intervention

To Much Money propping up the DOW,

Bonds "AREN'T" being bought and Interest Rates "ARE" going UP..


Get ready for a big adjustment .... A true Market Value.. 


Mar 14, 2014 3:30PM
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It's an unfriendly world for stocks because Ukraine needs bail out, which Russia is willing to help out about  $16-$18 billions in exchange for the union, that's why it is in thi****. It was started with the economy problem, don't forget.

Another real reason is China is definitely slowing down and China government is working for their people so they are not willing to bail out the riches by bailing out failed corporations.  So they let them default.

Another reason is Corporations can not cut employees to show profits any further.

*** Another real reason is labor market tightens is not true, that is why they still extend unemployment.
Mar 16, 2014 5:55PM
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Obama is an idiot. Just look at the wonderful health care law. I was paying $400 for a HSA family plan. Now the same plan costs $1200.  I'm now uninsured.  Great law. 
Mar 14, 2014 4:19PM
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And from the wreckage a new fuhrer will emerge. 
Mar 14, 2014 5:06PM
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stocks have been very friendly to me over the last four years  :)
Mar 15, 2014 12:05PM
Mar 15, 2014 8:06PM
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Forget all of these so called GURUS, forget the short term gyrations, stick to the fundamentals, and go long...you can't go wrong with the #1 economy in the world
Mar 17, 2014 9:50AM
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And the Crimea vote is effecting our Markets how...??  Guess I might need some clarifications..?

After the so-called "friendly vote" our DOW is up 150-170 points....Hmmm ??


Maybe CGT has an insight or a direct correlation explanation, concerning the manipulation..?

More at Noon or after the Close..

Mar 14, 2014 2:23PM
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"Airmen responsible for missile operations at Minot Air Force Base would have failed their portion of a major inspection in March 2013 but managed a "marginal" rating because their poor marks were blended with the better performance of support staff — like cooks and facilities managers — and they got a boost from the base's highly rated training program. The "marginal" rating, the equivalent of a "D'' in school, was reported previously. Now, details of the low performance by the launch officers, or missileers, entrusted with the keys to missiles have been revealed."
$$$$$$$

And? Outside of this issue involving nuclear missiles, the scenario is an exact duplicate of my experience at (crappy out of business) Bank. The "cooks" would be some obscure useless area of the bank while pertinent operations were outrageously dismal. Those managers running- dismal, fired the work force and made the transition to (flailing useless) Bank.
Our best are nowhere near those office suites, they are digging for their lives in dumpsters and re-inventing the wheel to put dinner on the table. Our WORST are on salary. Obama's alumni class (age) are literally incapable of normal living.
As we go to war and the bottom falls out of this artificially sweetened Kool Aid economy, what chance do we have for survival? Get off your salaries and LOOK. The business platforms have no enterprise ability. America should be funding start-ups to replace them now. The 600,000 new millionaires have no skills- just greed. We are educating to stare at screens. All Russia has to do is text them and when their i-Phones ring- shoot the tops of their heads when they look down. COME ON. Obama ruined the nation with all this foolishness. Can degrees run enterprises? Shouldn't we be finding out before it's too late? The world HATES us. We look a lot like the cultures destroyed because they were too corrupt. Is THAT YOUR legacy? It isn't mine. 
Mar 14, 2014 4:42PM
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One item in the news we can comment on. MSN obama protectionism is going a little overboard but we and onto you!
Mar 14, 2014 4:11PM
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One caveat to point 5 is that Shiller is using a contrived P/E ratio rather than the conventional P/E.  The more conventional P/E shows earnings at between 16 and 17 vs. a historic 15.  While still showing equities are fully valued, they are not overvalued as much as Shiller would have you believe. 
Mar 16, 2014 7:42PM
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OHBUMMY:Just because you keep repeating your lies about Obama doesn`t make it true.
Mar 16, 2014 7:39PM
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Lsoft:If you were smart you would have signed up for Obamacare and saved big bucks and

got better coverage.I have friends and relatives who did.

Mar 14, 2014 8:03PM
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Here is the TRUE scenario building that every stock holder should know...

- Our banks cannot sustain. 
- Before catastrophic failure, the banks will be shuttered.
- THEN the markets will fail and all exchanges shuttered.
- Frantic investors will lose it all as false money evaporates.
- The Internet will blink and reboot with every electronic account showing ZERO.
- A regulated script will replace electronic and paper money to resume society.
- Criminals and corruption will be arrested.
- They will be wearing different colored suits than business gray and the bracelets will lock.
- Reform bites. 
Mar 15, 2014 3:53AM
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"Chinese demand has been a major driver...increasingly, of luxury goods from high-end western manufacturers. And China is slowing."

Chinese internal consumption is 20% of its economy which is 1/3 of the USA's, where internal consumption is 83% of our economy.  This is a "sky is falling" article.  You have to stretch the truth to find reasons to call stocks "unfriendly."


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