Why the Bears Are Smiling

Along with facing high expectations, the economy is navigating myriad threats to growth. The energy market, for instance, has powered earnings growth on the shoulders of soaring crude prices. But oil prices at current levels are also an economic wild card. On some level, oil prices are a tax on consumers and businesses, and no one knows the effects of that strain.

Lending momentum to oil, the U.S. is waging an expensive war in Iraq and Afghanistan, and polls show Americans are growing increasingly doubtful about its odds for success. That exacerbates wide deficits being run by the federal government. Couple that with a sizable trade gap, and the expansion looks more precarious.

Consumers have also developed a massive debt overhang, driven mainly by soaring home prices and low interest rates that gave rise to a wave of refinancings. If long-term interest rates ever start behaving normally, many market watchers worry that it would lead to the bursting of a real estate bubble -- something that everyone agrees would amount to a huge blow to the economy.

The good news is that recent wage growth has provided a boost to consumers' balance sheets. For the first time in years, wage growth has outpaced growth in consumption spending so far in 2005, according to government statistics. Part of that comes from a 17% rise in interest payments in April taking a chunk out of consumption spending and indicating that debt levels are starting to be a headwind. But the 7.6% rise in wages that month, up from the 4.9% in the same month last year, makes up a much bigger part of the equation.

If wage growth continues to increase, consumer spending could bail out the expansion and help stocks weather whatever storms may lie ahead. Meanwhile, Greenspan's rate-tightening campaign appears poised to continue indefinitely. It may not inspire any gains in the stock market, but higher rates could at least give the Fed a lever to pull should something go wrong.

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