It’s dangerous when stock market investors to place too much emphasis on a single headline or statistic. After all, the global economy is a complicated place, and you need to know the whole story to truly invest wisely.
Unfortunately, a host of ugly reports have been coming out of the woodwork this May. Some of these stories are macroeconomic, and some of them are specific to individual companies. Some are domestic, and others are international.
But the one thing they have in common is that none of them is good.
That’s a big problem, because the low-volume months of summer might cause just a little bit of selling pressure to move the market significantly.
To be clear, I don’t relish the Chicken Little role here. I do believe the U.S. economy is slowly on the mend — though admittedly, we’re a ways away from a true bull market and a “self sustaining” recovery led by strong employment and higher spending from businesses and consumers alike.
Still, in the short term it seems foolish to get carried away with optimism. Here are my five reasons to be on the defensive in the next several weeks:
You may think it’s silly to panic over the prospect of China’s GDP growth slowing to “only” 8%. Well, it’s not the pace but the expectations that are the problem. As the eurozone region slips back into recession and the U.S. remains sluggish, we need China’s economic might more than ever — and the timing couldn’t be worse for its GDP growth rate to drop to the weakest pace in 13 years.
For a concrete example of this dynamic, look at global vehicle sales. Automakers around the world have piled into China, but recent reports indicate car sales in the first four months of 2012 were the lowest since 1998. Dealers now have massive inventories that foreshadow deep price cuts. That means even if sales pick up, margins will suffer.
So how will General Motors (NYSE:GM) make up this shortfall? Look to Europe, or depend on a surge in U.S. sales? Not likely on either front. It’s China or bust.
Adding to frustrations is the fact that Beijing recently said it will not employ another massive stimulus to boost the nation’s economy. That means companies like GM banking on China are going to have to adjust their expectations for the rest of 2012.
I couldn’t care less about Facebook (NASDAQ:FB) as an individual investment, and have said my piece about how only a fool would buy Facebook in the next six months. But the broader story of what this IPO means for the market and retail investors is worth telling.
First, the fact that Facebook was so hyped but wound up being the worst-performing offering in a decade is sure to have a chilling effect on the IPO market. Don’t expect any new deals or sexy companies generating buzz as a result.
Second, it proves how disinterested investors are. Underwriter Morgan Stanley () botched the IPO big-time by overestimating interest in buying shares, proving once again that Wall Street is a ghost town. If there was no interest in that circus show, what do you think volume is going to be like in the summer? There will be like 16 investors trading stocks in July — and when 15 of them decide to sell, expect the market to tank whether or not the downward move “makes sense.”
FB has proven how jaded investors are. And with this much general disinterest, it’s hard for even good stocks to gain traction.
I won’t belabor this other than to just give you a bulleted list of headlines you can click through if you feel like:
- Bank of Spain says nation stuck in recession in second quarter of 2012
- Italy’s bond rate skyrockets past 6% on contagion fears
- World’s top trade insurer stops underwriting Greece businesses for fear of default
- After austerity failed, Ireland applies for a $85 billion EU-IMF bailout
- Even Germany needs “structural reform” to tackle its debts
Fun stuff, huh?
4. Election-Year Politics
Mitt Romney has all-but-officially locked up the presidential nomination, and you know what that means: Now, instead of a mildly abrasive primary, we’ll get a full-on Super PAC assault from both sides.
We’ll be exposed to the joys of Mitt “Job Killer” Romney, a Plutocrat hack artist from Bain Capital who was the scourge of working America and pleases only his wealthy friends on Wall Street! Or worse, Barack “Job Killer” Obama, who bailed out his union buddies in Detroit and is bankrupting America, thanks to an 8% unemployment rate and a plan to tax the rich!
Wait … how can both candidates have the nickname “Job Killer” you ask? Well, because these campaigns are about winning, not making sense.
Expect nothing but ugly ads to run between now and November. Either it’ll be Mitt talking about how screwed our economy is, or Obama talking about how we need to nuke Wall Street.
Either way investors lose.
5. Housing … Still!
So, maybe you haven’t noticed, but mortgage rates are at historic lows. I’m talking 3.7% for a 30-year fixed mortgage. It’s like free money, considering the rate of inflation … but where are the buyers?
Here’s another fun bulleted list for you:
- Pending sales droped 5.5% in April, worst fall in a year
- There are 1.4 million foreclosed homes on the market
- Housing permits recently hit a 15-month low
- The Case–Shiller index of major metropolitan home prices declined once more in March, and some regions like Chicago saw the lowest home values in decade
- One out 3 Americans has an “underwater” mortgage
Academics love to talk about the stock market’s “wealth affect” by convincing Americans that things are looking up or looking grim based on the movement of the Dow. But in recent years, the housing market has been equally compelling — if not more so — because it’s so tied to the American economic outlook.
In short, if housing starts to flag again this summer, the market and consumer spending will soon follow.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP.