7 headwinds that could derail stocks
While the market is holding on to healthy gains so far this year, there are big headwinds that are worth watching, including political squabbling and rising gas prices.
The major stock market indexes are ahead so far in February. Gold (-GC) and silver (-SI) are lower. Interest rates have ticked a little higher.
Crude oil (-CL) in New York is lower, but Brent crude is higher, and gasoline prices are up more than 12%.
There are some worry signs. Retail sales have been weak. Leaked memos from Wal-Mart Stores (WMT) suggest their January sales were surprisingly slow, and February isn't doing much better. Wal-Mart reports fiscal-fourth quarter results before Thursday's open. Many retailers believe the culprit is a delay in income-tax processing and the return of Social Security tax rates to pre-2011 levels.
All this leaves one asking the question: What exactly are the markets signaling? A slump in the domestic economy or something less awful?The answer will become clearer in the next six weeks. Stocks may well swoon. But compromises on sequestration -- the required across-the-board spending cuts required under the 2011 budget bill -- and a possible battle royale over the government's debt limit could limit the damage.
Lack of action could result in a big swoon. Here's what to watch for:
The budget problems
There are three: Sequestration, starting March 1. The demand for Congress to pass a continuing budget resolution by March 27 and the raising the debt-ceiling, probably around July 1. Not raising the debt ceiling could shut down all but the most essential government functions. It could delay Social Security checks, stop science research cold. It could mean the United States defaults on its debt.
Don't make firm plans to visit the Grand Tetons or Yellowstone National Park until all three issues are resolved.
Take a good look this week at earnings reports from auto dealer Lithia Motors (LAD), La-Z-Boy (LAD), homebuilder Toll Bros. (TOL), Nordstrom (JWN) and Wal-Mart. These are all companies that hear directly about how customers see the economy.
How the market reacts will not be so much on the results but on how the companies characterize the moods of their customers, the forward earnings guidance they offer -- if any -- and what goes into the guidance.
The frothy or not-so-frothy market
The Dow Jones industrials ($INDU) are 1.3% below their all time closing high of 1,4164.53, set in October 2007, and the Standard & Poor's 500 Index ($INX) is 2.9% below its all-time close, also set in 2007.
There's a good chance both will set new records this year, leading to fretting of a some kind of a pullback.
A big-time decline requires a specific catalyst: high interest rates, high oil prices or a real estate bubble, for example.
Many analysts forget the crippling effect of rising oil prices in 2008. Oil prices gutted auto sales and were led to the bankruptcies of General Motors (GM) and Chrysler.
A government shut-down will have a nasty but probably short-lived effect because a resolution will come relatively quickly.
Oil and gasoline prices
It's Brent crude, the benchmark North Sea crude oil, that determines what you pay at the gasoline pump. Brent closed Friday at $117.66 a barrel, up 5.9%.
AAA's Daily Fuel Gauge Report put the average retail price of gasoline at $3.714 a gallon on Sunday. That's up 12.8% for the year and up 5.3% from a year ago.
Let's say that 5.3% gap continues until April 6. That's when retail gas prices peaked in 2012 -- at $3.936 a gallon. A 5.3% increase over that price would be $4.1446. That would break the old U.S. record price, $4.114 a gallon, set on July 18, 2008.
The 10-year Treasury yield was 2.007% on Friday. That's up from 1.41% on July 25. A 2% yield is not a bad thing. (13.57%, its highest level, set in December 1980, was a very bad thing.)
A 10-year yield above 2% probably reflects the belief of many investors that the global economy will grow in 2013, thanks mostly to renewed activity in China, Japan and the United States.
But if the market senses rates can move substantially that could force the Federal Reserve to take a hard look at whether it's the economy or inflation at work.
Here's another rate to watch: the rate on a 30-year mortgage. Bankrate.com put the rate at 3.67% on Friday. That's ridiculously low.
Here's another rate to watch: the yield on a 1-year certificate of deposit. It was 1.4% on Friday. When rates do rise, savers will rejoice.
Europe and Italy
Europe has been relatively quiet of late. Watch Italy, which has an election coming on Feb. 24-25.
If the colorful former Prime Minister Silvio Berlusconi regains power, Europe will become a loud problem very quickly. The election will be a referendum on austerity. The government of Mario Monti has cheered markets and Germany will big spending cuts and tax increases.
Unemployment has been at 11.2% since October—a 13-year high. The Bank of Italy expects the economy to contract 1% this year, extending a recession that began at the end of 2011.
Yes, yes, currencies are boring except that they aren't.
Take Japan. The yen has dropped 14.1% against the dollar and 17% or so against the euro since the end of November. Those are, to be frank, astounding moves.
Most of it is due to efforts of the new Japanese government. The government wants a lower yen to make exports of Japanese goods and services more competitive in global markets.
A lower currency helps your exports and makes imports more expensive. But if a lower currency boosts overall demand, maybe it's not so bad.
Finance ministers last week did not object to Japan's currency devaluation. But they may before too long.
|Markets for the week|
|Feb. 15||Feb. 8||% chg.||YTD chg.|
|U.S. Dollar Index||80.58||80.32||0.32%||0.9%|
|10-yr. Treasury yield||2.01%||1.95%||2.71%||14.3%|
|(per troy ounce)|
Seems to me Mr. Blaine gets quite a bit less MSN space than he used to...
This, I found to be a quality piece, which was not intended to enlighten you to the next market movement (who knows that?), simply a discussion of the US and global challenges that market watchers will be following.
I don't expect Mr. Blaine or any other reporter/analyst to tell me 'when', and I caution those that look for that in any free publication.
What I do look for, and thankfully respect the author for, is a clean, clear representation of information that might be useful to me in my decision process.
Have a great day!
IF THESE GUYS KNEW WHAT WOULD HAPPEN THEY WOULDN'T BE WRITING FOR MSN
LeBear....Yes, I would ditto that about Charley, and the rest you wrote...
As far as Economist', Sarduci...There is an "old saying"...
" Put 10 Economist in Bag, shake them up and roll them out on the Floor; "
And "You will get 10 different Opinions."
No trolling off this boat...Restore.
Just poking that guy Mciahel (that doesn't know how to spell his name) and his PUTZ...
And Yes, I agree the World's problems are much bigger then any U.S. President.
But way too many Countries look to us, to help solve their problems...We can't, we have our own.
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