by Jeannette Di Louie, Investment U Research Team
Last year left investors hoping for positive change, and they certainly seemed to have gotten it in 2009.
Though the Dow plummeted to a bruising low of 6,547 in March, the major U.S. indexes have since largely reflected a more upbeat attitude.
Just yesterday, the Dow closed at 10,548.51, the Nasdaq sat at 2,291.28 and the S&P 500 set the financial world into a tizzy by fully retracing 50% of what it had previously lost.
Even the job market got some good news on Tuesday, when CareerBuilder.com polls showed that a full fifth of employers plan to add full-time employees in the coming year (as compared to 14% for 2009… with only 9% foreseeing further cuts).
Emerging markets including China, India and Brazil all recovered nicely, as did most major European and Asian stocks – all in all painting a rosy picture for 2010.
But pictures can be deceiving. And this one shows some serious hidden and not-so hidden flaws in both the U.S. and the larger global economy.
U.S. Woes Lie Just Underneath the Surface
The U.S. has had its fair share of problems, but rather than fix them, it seems to have covered them up.
Yes, the housing market has shown signs of recovering, with prices stabilizing and even rising. But that’s because the government devised tax credits to tempt homebuyers into the market… especially first-time owners.
Not only is that an artificial prop, but that kind of “incentive” already got us into trouble before, when we encouraged spending that U.S. citizens perhaps couldn’t really afford.
And beneath the promise of job openings lies the following facts about coming employer trends according to CareerBuilder.com:
- 37% do plan to hire workers, but that’s only to replace underperforming or unsatisfactory current employees.
- 57% expect to raise current employee salaries… down from 65% last year.
- 37% mentioned cutting benefits, including medical coverage, matching 401k contributions and bonuses.
Overall, that means consumer spending on clothes, cars, jewelry, electronics, etc. won’t be rising anytime soon, and it may even fall further, especially if inflation hits.
With the amount of money the government has and is still printing and spending, inflation could hit anytime after Federal Reserve Chairman Ben Bernanke allows interest rates to rise.
And most experts know the U.S. is in trouble too, hence the reason why Steven Hess, Moody’s Investor Service’s lead analyst for the U.S. said:
“The AAA rating of the U.S. is not guaranteed. So if they don’t get the deficit down in the next 3-4 years to a sustainable level, then the rating will be in jeopardy.”
Global Problems Contribute to Uncertain Future
The Unites States isn’t the only one in trouble either…
Just look at the once envied Dubai, which the world recently learned was laden with debt. It didn’t have a prayer of handling on its own. The neighboring Abu Dhabi stepped in with a $10 billion loan, but that doesn’t mean Dubai is instantly cured by any means.
Meanwhile, Greece had its credit rating cut to A- by Standard & Poor’s in January, and then again earlier this month by Moody’s from A1 to A2. And Mexico had the markets buzzing for the same reasons around the same time.
Even Australia, which never technically entered a recession, admits that it might still face a bumpy road ahead.
IG Markets institutional dealer Chris Weston in Sydney summed it up best by saying: “Market psychology, at least in the short term, is relatively positive. We are in a seasonal sweet spot and I think we will trade higher in January, but we will need a strong earnings season or we will see a correction.”
The 2010 Forecast
Those warning signs point to some kind of drop in the future. But with global markets largely showing bullish or bullish consolidation patterns, it’s difficult to know when stocks will reflect those negative factors.
So a word to the wise: Keep a close eye on what’s really going on… not just the reassuring headlines that mask more serious problems. And set trailing stops whenever possible, so that when the time comes, you won’t lose the farm.
But don’t pull out of the markets either. They still have further to go in at least the short term.
Jeannette Di Louie