If the Dow Jones Industrial Average closes higher today, it will mark the longest winning streak since November 1996. We’ve discussed before why the Dow is a highly flawed measure of the overall economy and even the stock market, but it still gets attention. What could possibly go wrong?
1. It’s not a November 1996 economy, when unemployment was low, average Americans were seeing improved wages compared to the declines experienced since the late 1970s and the economy was highly dynamic. If you lost your job one day, you likely had another the next day. NAFTA had not begun its giant sucking sound. China was not in the World Trade Organization, playing by its own rules. The economy was not as financialized as today and banks were still relatively highly regulated. Americans were not nearly as in debt.
2. The market has been seized by lemming mentality and valuations are starting to detach from reality. Sure, some stocks are undervalued, but others are not. Bonds are producing little return, hence the allure of stocks — that could change.
3. Shocks will sink this market in a Wall Street minute. Among the potential black swans: North Korea really does it this time; China’s property bubble pops; growing dissatisfaction with Beijing’s response to pollution and inequality leads to civil unrest; a miscalculation in Asia leads to a hot confrontation between China and Japan (or Vietnam or the Philippines); the eurozone crisis heats up again; the Middle East blows up; Pakistan spins out of control; a terrorist attack.
4. The sequester starts to bite as government budget cuts lead to layoffs and cut into the profits of defense contractors. The obsession with immediate debt reduction is already a recipe to slow a still-weak economy. Our dysfunctional government is not a sign of confidence for investors.
5. Americans, most of whom are still facing stagnant wages and lost wealth from the recession, can’t keep up their role as “consumers.”
6. Oil prices rise, as the energy market interprets a stronger economy worldwide and demand rises — until the price rise strangles expansion once again.
You have to make your own investment decisions. But this bull market faces many threats.
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Today’s Econ Haiku:
Boeing gets the go
Hope the battery fix works
Or a short hits shares