I’ve been arguing since Sept. 13 (when I published my top ten reasons that the world isn’t coming to an end) that the US economy has stabilized and that it’s time to shift out of bonds into stocks. The Republican landslide in November and the Obama administration’s shift to the center improve the outlook. But I don’t expect a normal recovery or fast growth or spectacular equity returns. Here are ten reasons why:
1) Housing is still in the dumps, which means that consumer balance sheets remain miserable.
2) The municipal debt crisis will go on for years. Falling real estate values affect municipal tax collections with a lag, and the miserable real estate market has yet to wreak its full damage on bankrupt cities and counties.
3) The consumer’s comeback is overrated, as today’s retail sales data suggest. Wage and salary growth remains muted, balance sheets (as noted) remain depressed, and the baby boomers are heading towards retirement with very little in the bank.
4) Profit growth is steady but muted (click to enlarge).
5) There still isn’t a lot of money going into American venture capital. Half of the 32 IPOs during the 4th quarter were Chinese companies backed by US investors.
6) Europe’s problems are far from over. Expect more shocks, especially from Spain.
7) Foreign central banks are net sellers of the long end of the Treasury curve. That’s an important reason for the backup in long-term interest rates. If the 10-year Treasury yield hits 4%, money is likely to slip back into fixed income out of equities.
8) The consequences of the Obama administration’s attempt to deconstruct America’s global role are likely to push up oil prices (guess what kind of stocks I’ve been buying), which can’t be good for the US economy.
9) Small business conditions remain tough. In the latest Discover Small Business Watch survey, 43 percent of small busines owners expect conditions to worsen vs. 25% expecting improvement, and 42% will reduce spending vs. 21% planning to increase spending.
But my top reason to be cautious is that small business just isn’t hiring:
10) The National Federation of Independent Business survey is similar: only 9% of businesses report unfilled job openings. Only 4% of businesses plan to create new jobs.