The market staged a nice rally to end the first half of the year on positive news from the European Summit. However, I would be cautious to start the second half of the year as the markets face significant headwinds.
10 concerns to start the second half of the year with:
- Reality is already hitting the latest European "plan". The German papers are already excoriating Merkel for making the concessions she made at the recent summit and some legislators are suing to keep Germany from the fiscal pact and bailout plan German parliament just approved. Given 80% of Germans believe Greece should be kicked out of the Euro, don't look for any more movement from the German chancellor anytime in the near future.
- The Supreme Court's recent punt on Obamacare is likely to have three impacts on the economy and the markets, none of them good. The act is likely to cost at least 1mm jobs (CBO estimate), reduce business confidence and hiring (especially small business) and will raise dividend and capital gains taxes for individuals with over $250,000 of income by 3.8%. This last impact is likely to accelerate selling in the market on the margin towards the end of the year.
- This "Fiscal Cliff" still looms and look for this to be a story that dominates headlines in the next five months along with the European crisis and the presidential election.
- The chamber of commerce estimates the defense cuts that will happen unless resolution of the budget impasse is achieved, will cost another 1mm jobs in the economy.
- June consumer confidence fell sharply in June, despite falling gas prices on concerns around employment. This has already had a negative impact on some of the high PE/high beta retailer stocks like Lululemon (LULU) which is down some 20% in the last month.
- It is unlikely we are likely to get good news on the job front in the near future. After May's dismal report, consensus is for 80,000 to 100,000 new jobs when the latest report hits Friday. This reading could hit the market hard if it comes in significantly under 80,000 and I would also look for the previous month's job growth to be revised lower as a possible negative event.
- U.S. Multinationals are starting to be hurt by slowing growth overseas. Nike (NKE) lost more than 10% Friday on slowing sales from China. Procter & Gamble (PG), Starbucks (SBUX) and Hewlett Packard (HPQ) have also all warned lately of their challenges in Europe.
- S&P earnings are expected to increase 5.8% in the second quarter. However, if you take out what are expected to be stellar earnings from Apple (AAPL) and a turnaround from a poor 2Q2011 from Bank of America (BAC); S&P earnings are expected to decline .4% in the 2nd quarter. Earnings have been one of the main pillars of the stock market over the last three years. Erosion in this support is unlikely to have positive effects on the market.
- Things are not likely to get any better in Europe anytime soon. Unemployment in the Eurozone was at a record 11.1% and Italian consumer confidence is at all-time low.
- Unlike 2009, China does not look like it will be able to accelerate growth. In fact, the Middle Kingdom looks like it could be heading for a hard landing.
Be careful out there. Keep that dry powder handy, we will likely get some lower entry points by end of summer.