Will Economic Headwinds Stall the Equity Uptrend?
NEW YORK (TheStreet) -- Investment caution flags have been raised by the economic headwinds, both in the U.S. and the world, but history may imply a different outcome.
Headwind 1A slowdown in worldwide growth -- since the bounce off of the 2009 recession, worldwide economic growth has been slowing, from near 5% in 2010 to about 2% in 2013. This includes growth in every market (developed, emerging and the BRICS);
Headwind 2Rising U.S. interest rates -- some say that rising rates are sure to impact consumer spending, and the pundits tell us that rising interest rates will surely have an impact on home prices and sales. There already is evidence that demand for mortgages has slowed;
Headwind 3The job market is not as healthy as the headline -- while June created 195,000 jobs, 240,000 full time jobs were lost (implying that 435,000 part-time jobs were created). In addition, short-term discouraged workers rose by 247,000 to 1,027,000. The holders of 75% of the newly created part-time jobs wished they had full-time ones. So, while the official U.3 unemployment rate remained at 7.6%, the U.6 rate (which takes into account part-time job holder desires for full-time work) rose a whopping .5% from 13.8% to 14.3%;
Headwind 4Sequestration -- while this has not had a big impact to date, the likely failure of a political agreement for the upcoming fiscal year could cause significant issues. Already, Defense Secretary Hagel has put the budget cut number for the Pentagon at $52 billion;
Headwind 5Political Instability -- tensions in the Middle East (a coup in Egypt, civil war in Syria, unrest in Turkey), to say nothing of the threat from Iran's nuclear program, can potentially wreak havoc on the markets. There are also social tensions in Brazil where inflation, running at 6.7%, has caused the central bank to raise the base bank lending rate to 8.5%. Despite these headwinds and the relatively small equity market correction during the "taper tantrum," by mid-July, U.S. equity markets again set new highs in the wake of Bernanke's reassurances that monetary accommodation was still entrenched. Many believe that the headwinds, in conjunction with a market that has not really paused in its uptrend for nearly a year, could result in a renewed bear market, or, at least, in a significant correction, despite the continuance of easy money.
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