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The 2 Key Risks for Stocks
05/02/2012 1:20 pm EST
Bulls will have to reckon with rising gas prices and, eventually, higher interest rates, says Bryan Perry, editor of Cash Machine.
Bryan, it's an election year. There's just a lot going on in Europe, and with the Fed and the macro picture. Tell us what you see looking ahead.
Well, it is an election year, and typically history is on the side of the bulls during an election year.
We've gotten off to a good start. The old saying is that as January goes, so goes the rest of the year. So let's hope the January effect is for real this time, because we certainly don't want a repeat of last year and the rollercoaster ride that we got for our dollar. That's just very unnerving-a lot of anxiety, a lot of flash crash-type scenarios, and really it's nice to get off to a stable start.
Now can we build on that? Certainly if earnings and the data that we're getting continues to trend higher. It's just not a one-trick pony in the first month of the year where we've gotten some decent data, but is there stickiness to it?
Interest rates are down.the Fed's committed to it. It doesn't mean they can control it; the bond market votes every day, and the Fed votes once every 45. We'll see if in fact if things do pick up.
There are two forms of inflation out there that are threatening. One is real inflation. You've got the Department of Energy, Kate, talking about maybe $5 gasoline somewhere in the middle of the year. Where that comes from, the logic, I'm not sure where.
Consumer spending was up about $19 billion for the month of December-way off the chart. People are back to using credit cards in order to maintain their good feeling about life in general, so I think that that's an issue.
OK, we may see.if gas prices shoot up, spending definitely curtails. No question about it in a consumer-driven economy. That's something to be watchful of.
Second, we have what is called monetary inflation. Certainly, we're printing debt to the tune of $100 billion per month.the Treasury is. Now, certainly most of it is short interest rate-related debt, but it's still debt nonetheless.
If we don't get a handle on the long-term debt scenario, then at some point down the line, these bond auctions that are going so smoothly may not be so smooth. You need to see that demand to buy our debt constantly to the tune that we're printing it out.
If they decide they want a little bit more bang for their buck at these auctions, you could see monetary inflation also kick in, where interest rates jump overnight in a bad auction, like we've see in Europe. There's that inherent risk out there.
But that's probably next year, after the election. All of this stuff gets put on hold during an election year until after the election. The market senses that. And it's a do-nothing Congress.
It's kind of OK, we'll get to the big problems next year, but right now everybody is talking about trying to just maintain low interest rates, revitalize the housing market, and we're starting to see some better payroll numbers. Incrementally, but still better nonetheless as well.
The wind is to the back of the bulls right now. Still cautious, but that's okay. The wall of worry is what drives the market higher in many, many scenarios.
We're seeing the numbers come in. S&P 500 companies beat estimates of earnings, around 61% of them had, and typically you get about 75% or so. What we are seeing is not as good as usual.
But the bar was set so low going into the end of the quarter because you had a lot of companies laying eggs going into the fourth quarter. You had Oracle (ORCL), Juniper (JNPR), you had several.Accenture (ACN) missed their numbers because of exchange-rate issues.
You had some bellwether names, typically, that are supposed to be very strong in the fourth and first quarter: technology. Technology is why people still believe the sky is blue in this country. We want to see technology do well, because that is the leading sector of our economy in terms of ingenuity, new job creation, new ideas, and staying ahead of competition worldwide.
I like the backdrop right now. It looks good, but it's not great, because there are still some things out there that could still steer us off of the straight and narrow course here.
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