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.

By Charley Blaine Feb 18, 2013 10:14AM
Stock market © Digital Vision/SuperStockAs U.S. financial markets take a breather for President's Day, this is where things stand and the six things one should look for over the next week or so.

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.

Retail earnings
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.

Interest rates
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.

Currency rates
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.
Dow Industrials

13,981.76

13,992.97

-0.08%

6.7%
S&P 500

1,519.79

1,517.93

0.12%

6.6%
Nasdaq 

3,192.03

3,193.87

-0.06%

5.7%
Russell 2000

923.15

913.67

1.04%

8.7%
Crude oil 

$95.86

$95.72

0.15%

4.4%
(per barrel)











U.S. Dollar Index 

80.58

80.32

0.32%

0.9%
10-yr. Treasury yield

2.01%

1.95%

2.71%

14.3%
Gold

$1,609.50

$1,666.90

-3.44%

-4.0%
(per troy ounce)













45Comments
Feb 18, 2013 3:44PM
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Everything Charley states as a "watch" target siphons or requires it without reciprocation from the economy. We have all sorts of paper and button pushers on salary plus bonus, but no one is actually creating ECONOMY. The budget means nothing to me because we don't have an economy. There's trouble in Europe. So what, we don't have an economy. Record low interest rates and the President says: refinance. Not. No economy. If we had a real poll not a dummy poll (like the one that asked gun owners if we should have more gun control and SURPRISE... 48% said we should)... the question to ask is-- are you actually netting a profit strictly speaking-- off your day-job wages? The answer won't shock us... most will say: NO. Since day-job wages create economy, the sole prop that keeps us from a sharp drop is-- Ben Bernanke. Flat out, he recovers the markets because the number is worth more to him than an economy. ALL of our issues, crises and frustrations point to just one thing... a lack of real ECONOMY. How do we get it? Stop Operation Twist. Raise the Bank Rate to 12%. Require banks to service their own credit. Reconcile the ACH, EFT and Derivatives outstandings. Find out if all three are not borrowed and owed by and to the same people. End Trusts and Incorporation because both unfairly give anonymity to crooks. Start hiring. Ask first. If there is no pulse, FIRE, hire to replace the grubbers. We have two choices and I prefer-- moving forward not bending over forward-- any longer. Congress acts or gets the axe. One and all.
Feb 18, 2013 5:03PM
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V_L Has it right. We have not had a manufacturing base for 30 years. Until we get back to exporting our natural resources we will never revive the economy. Forget all the rules and regulations concerning minimum wage and so forth. We are being smothered by the gov't and their regulations. Inflation will sap the last breath of our economy and detroy the middle class.
Feb 18, 2013 3:59PM
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walmart, I think people are waking up, there pricing, is not the same from store to store and all they carry is 2nd grade product. So you don't go there to by appliance any more. I think who is running the company now is just trying to take all the money they can get. Not what Sam had in mine
Feb 18, 2013 5:45PM
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can't blame bush anymore, blame your golf playing man with the backward plan.
Feb 18, 2013 3:55PM
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They say the economy is up then later say the economy is down. They can't seem to get their story straight. Just go to Disneyland and take a roller coaster rides.
Feb 18, 2013 6:20PM
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Where do they get these brain dead hacks who say the jobs numbers are still looking good, and that they rely on the stock market numbers to see where the "economy" is going. Get these people the he// off of this "news" channel. My 4 year old daughter could do a better job of reporting the sh*thole this country has become...
Feb 18, 2013 6:26PM
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unless the federal government cuts spending and regulations, it is not whether we will have a downward shock it is when. since they have so much power they can dam up the inevitable for another 1-4 years and the longer the move is postponed  the steeper it will  be.
Feb 18, 2013 5:54PM
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When sequestration hits, what´s Bernanke going to do? Increase QE to offset it? The Congress should reign on the Fed, start limiting its money printing rights !
Feb 18, 2013 3:23PM
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Time to re-adjust the Sails on the Dingy...Gonna try "tacking back" to Port.
Feb 18, 2013 4:09PM
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Wages are no longer equal to money supply, thanks to the Fed's. This is properly why they want to raise minimum wages. The chickens are coming home to roost.
Feb 18, 2013 5:02PM
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Morgan Brittany you are correct about inflation, but wrong on the Walmart greeters.  Walmart has not had greeters for a year breaking their promises to the elderly to keep them involved in the community.  The echo boomers were their bread and butter, because of consistent monthly income, and Walmart made the choice to slap them in the face.  You take away our support, we take away ours.  Second, Walmart does not offer the lowest prices and their customer base is very Internet savvy in doing comparison pricing.  Why does Walmart charge $119 for something on sale that can be brought at Lowe's for $89 at regular pricing.  They think their customer base is stupid - big mistake.  Third, Walmart peddles food imported from China that has a horrible taste and goes right in the garbage, so the consumer again no longer trusts them.  Fourth, their meat is almost unfit for human consumption.  Fifth, their customers are realizing that the company is collecting their debit card information and cross checking it against online purchases to send directed email ads and we don't like this invasion of privacy.  So no more online buys and only cash out with the limited cash in our pockets.   Sixth, Walmart changes policies like I change my underwear only further alienating its customer base.  Seventh, the store clerks claim that corporate states, "This is no longer Sam Walton's Walmart"; a man that most customers revered and put fortunes in the pockets of the executives - so it does not bode well to be so disrespectful to Sam.  Now add in the tax increases along with a corporate culture that treats its minions as second class citizens and you have a consumer base saying "do I need it or want it and can I get it cheaper some place else" thereby choosing to leave it on the shelf if last two items are true instead of debating the issue with some check out clerk.
Feb 18, 2013 4:50PM
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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!

 

Feb 18, 2013 11:37AM
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Looks like the next few weeks are going to be a little rough, or Roller Coastery...?
Feb 18, 2013 3:36PM
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POOR ENTERTAINMENT

IF THESE GUYS KNEW WHAT WOULD HAPPEN THEY WOULDN'T BE WRITING FOR MSN

Feb 19, 2013 7:18AM
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Rising fuel prices may mean inflation is already picking up. When it finally blows up, it´s going to be sudden.
Feb 18, 2013 5:58PM
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Impeach Bernanke urgently or face total disaster soon !!! 
Feb 18, 2013 8:51PM
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Well they have to cut spending 10-20% somewhere and it's either Defense. Education, Medicare and Medicaid, Social Security Disability and Retirement or other frills (Farm subsidies, NASA, NSF, etc.) or keep spending and debase the USD by printing more each year. I vote for Defense, Education, Medicaid and SS Disability and frills. We're already debasing the USD. No real magic left in the bag as we've been living on barrowed money for at least 10 years if not 20 years.
Feb 18, 2013 4:56PM
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Supposedly around  50 cents of the cost of a gallon of gas is due to speculators 
Feb 18, 2013 5:13PM
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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."

Feb 18, 2013 7:37PM
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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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