The markets closed out the first quarter of 2013 with a big rally and the bulls seem to remain in charge. The Dow Jones Industrial Average (DJIA) is up more than 11% and the S&P 500 is up 10% so far in 2013, and they are both at all-time closing highs. We recently gave our synopsis showing the road map for the bull market to continue in April, but we also want to be open to the obvious and less obvious risks. Unfortunately for the market bulls, there are two sides to a coin.
24/7 Wall St. wants to cover the other side of the bull market coin. The saying goes, “Bull markets often crawl up a wall of worry.” Here are 10 serious considerations that those of us who remain bullish on stocks need to keep in the back of our minds. We have looked at the year-to-date changes for much of the analysis, and historical data or color has been added elsewhere.
1. The Ticker Tape and Market Internals: For starters, when markets hit all-time highs, the ticker tape and market internals come into focus. The S&P 500 took more than two weeks of challenging the all-time high before closing above it, even though the DJIA already had broken out. In fact, it looks like the S&P was within 10 points of the all-time closing high for almost three weeks before punching through. Some may question that the ticker tape is not as strong as you might expect. DJIA stocks are up year-to-date by a ratio of 14:1, but the S&P ratio is close to 7:1 year-to-date. Capital inflows into stocks have been monumental, but they seem to have slowed. Even with the normal bump at the end of a month and start of a month from 401K monies, what if that starts to peter out? It takes money to make money, and it actually does require inflows to keep driving up stock prices. What if the “sell in May and go away” theme comes early this year?
2. The European Follies: That darned European situation just refuses to go away. First it was all the woes of the PIIGS (Portugal, Italy, Ireland, Greece, Spain). But in 2013 suddenly Cyprus matters. This inconsequential island nation is just not very relative. Outside of being an offshore banking mecca and a tourist destination, and having a British naval base, this nation should have no importance at all. Unfortunately, that is now the world we live in. Imagine if Spain, Italy, Portugal or Greece were suddenly back in the soup. They at least matter compared to Cyprus. A Dow Jones headline caught our attention: Greek Retail Sales Plunge 15.7% as Country Enters Sixth Year of Recession. Any new spike higher in interest rates around the PIIGS, or any other unwelcome growing anti-austerity measures, could tip Europe again. If Europe unexpectedly gets far worse again all of a sudden, kiss our great U.S. bull market bye-bye.
3. Employment and Economic Reversals: What if the employment data really does get wrecked by the spending sequestration? This is a low probability because sequestration was really just cutting the growth of spending rather than cutting actual spending. But what if employment just reverses again? The validity of the 7.7% unemployment rate from February can be debated, but that was still the best reading in four years. What if companies just start laying workers off or have furloughs for, say, the entire slow summer period? It seems unlikely, but it is possible. The equity markets would not respond positively if the official unemployment rate gets back up around 8%.