As I read more and more about how investors are becoming skittish wondering how long this bullish market will last, I am looking at current events and see signs that could have an influence upon the market and bring a correction or pullback investors have been worrying about. Let's take a look at three different things that are looming large out there I believe could have a significant influence upon the stock market.
The markets continue to move up, closer to a wall of adverse challenges. Look at the things that the market has to face right now:
- Sloth-like economy growth
- Political obstruction
- Lukewarm earnings
- Always the European crisis
- Gas prices that love to climb
Economists have been speculating for a little while now about a turnaround or at least just a correction. I do not believe I have read anything from anyone who says we will be moving into a bear market soon, but they do believe that the low volatility means that a
correction is coming soon that could be up to 5% or more. Statistically speaking, the average market pullback has been between 5 and 10% and a correction 10 and 20%. The SPY (SPDR of S&P 500) is presently trading at 151.72 and just a 5% pullback could mean a pullback clear down to 144.14. It hasn't been that low since the end of December 2012.
The spending cuts we all have been hearing about that were signed in the place by the president last Friday are going to be around for a while and add fuel to the idea that a market pullback may come sooner than later. It is interesting how the White House talked about how dire the results of these budget cuts would be on the economy while we are coming up to the date and then after they were signed into place, the Pied Piper plays a different tune. Senate Republican leader Mitch McConnell has been calling the cuts "modest" while John Boehner said he isn't even sure if it will hurt the economy. Even the White House backed off the doomsday scenario of the budget cuts taking place and this tells me that it is not something that appears that is going to be solved in the near future.
Beginnings of a Slowdown in China?
What's happening in China is sure to impact the markets as the week progresses. The annual session of the National People's Congress starts Tuesday and the last edict made has had an adverse effect on global markets - except Japan. Because home prices were inflating so quickly in China the government stepped in and imposed new restrictions on the industry. Here is a summary of what they did:
- Higher down payments on mortgage rates for second homes
- A 20% capital gains tax on existing home sales
This is a direct reversal of the 2012 edict which softened property controls, and the new edict given should cause the value of financial assets to fall. Not only did China's market fall but it had an adverse effect on our market starting off here Monday morning. The markets are wondering what type of impact this will have on China's future growth. Will it slow it down? Adding firepower to this question was recent data collected showing China's service sector has expanded at its slowest rate in the last five years.
Italian Election Looming
There is a possibility of another Italian election looming on the horizon, and this could also have an adverse effect on the markets in the coming months. Why? For those of you who haven't followed the election here is a quick summary and show you where we are right now:
1. Beppe Grillo's M5S placed first in the election with 25% and their slogan was "send them home." Basically they want to get rid of the old guard.
2. Silvio Berlusconi, part of the old guard and completely opposite of M5S, must work with Beppe Grillo to defeat Pier Luigi Bersani whose center-left alliance won a razor thin plurality and the working majority.
3. Basically it really has no working majority in the Senate so investors are wondering how long the government can last and this will not be good for Italy's ability to pay back its loans.
The results of the first election saw the markets react very negatively and there is a high probability that the Italian government will not be able to find consensus and thus a new election will have to take place. How will the Eurozone weather the next election is anybody's guess, but it is something out there just waiting to have influence upon our markets again.
The global events that are looming on the horizon look like they could have an adverse effect on our markets and it looks like it's something that could happen soon. When we combine our political stalemate and the cutbacks that look like they're going to be around for a while plus the possibility of what could happen globally between Italy and maybe even a Chinese economic slowdown, our market correction may manifest sooner rather than later.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
