Investors Take Warning: Storm Clouds Gathering

Photo (cc) by paul bica

As parties go, this one’s been raging for quite a while. After dipping below 6,600 just two short years ago, the Dow Jones Industrial Average has now nearly doubled.

If you were fortunate enough to invest in stocks near the market bottom – and if you bought the right stocks – you’ve made a killing. (Take a look at my personal portfolio and you’ll see what I mean.)

But that’s history. If you don’t own stocks, stock mutual funds, or ETFs, is now the time to buy? And if you were lucky (or smart) enough to pull the trigger back in 2009, is it time to sell and protect your profits and/or your principal?

The answer to both questions is no. Back on March 11, in this Ask Stacy column, I said the market wasn’t looking good and that I’d be reluctant to buy in the immediate future. But I also believe that the economy will continue to recover, so there’s no reason to bail either. In short, this is one of those times when the long-term investor adjusts their expectations – but not their portfolio.

Trouble ahead?

When I say adjust your expectations, what I mean is brace for some short-term bruising. Here are a few economic headwinds around these days…

  • The end of QE2: The government’s second program to keep interest rates low – known as quantitative easing, or QE – is set to end in June. This program, through which the Federal Reserve has been buying about $75 billion in treasury bonds weekly, is designed to keep interest rates low. When the buying stops, some say rates could rise and stocks could fall. Here’s an article from U.S. News & World Report with more details.
  • Job growth is slowing: After last week’s announcement that only 54,000 jobs were created in May, economists are fretting that consumer spending will slow. Since consumer spending makes up 70 percent of the U.S. economy, that’s a potential drag on stocks.
  • Political wrangling over the debt ceiling. As I wrote a couple of weeks ago, our nation is now bumping up against its credit limits. Some think refusing to increase the government’s ability to borrow isn’t that big a deal, while others think failing to raise the debt ceiling would be catastrophic. But one thing’s for sure: Stocks won’t respond well if the government is unable to meet all of its obligations when the limit is reached on August 2.
  • High gas prices: Money you spend on gas helps the Middle East and big oil companies but doesn’t help the American economy.
  • Housing prices: Home prices nationwide are now at their lowest since 2002. According to this AP article, homeowners have now lost more equity than during the Great Depression of the 1930s – back then, it took 19 years for prices to recover. If folks are afraid to buy or can’t sell, that’s another drag on the economy.
  • The European debt crisis: It may not seem that Greece’s problems could affect us, but with the increasingly global economy, when Europe sneezes, U.S. markets could catch a cold. Recently, Standard & Poor’s cut Greek government debt to junk status, and stocks worldwide took a hit.
  • Emerging market slowdown: While our economy has been sputtering, emerging economies in Asia and elsewhere – most notably, China – have been going gangbusters. But the Chinese government recently raised interest rates and took other measures to keep their economy from overheating – a negative for the many U.S. companies that do business there. According to this recent CNN/Money article, “It goes without saying that a healthy Chinese economy is key to keeping the U.S. and global recovery on track.”

Those are some of the problems that stocks are currently facing, and they’re reason enough to be concerned about the short-term. But as I said earlier, while these concerns are enough to keep me on the sidelines, they’re not enough to chase me out of the stock market. Why haven’t I sold a single share?

The good stuff

  • Interest rates are still low: Although the Fed’s QE2 program will end soon, the Fed has signaled they’re not concerned about inflation and will keep interest rates low until they’re sure the economy is growing again. Low interest rates are good for stocks.
  • The economy is still growing: While only 54,000 jobs were added during May – a number far below estimates – jobs were still added and the economy is still growing. An economy that’s growing at a snail’s pace isn’t the same as one that’s shrinking. In a speech this week, Federal Reserve Chairman Ben Bernanke said, “The economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed.”
  • Gas prices are coming down: At a national average of $3.76/gallon, prices are already down from a few weeks ago. From this May 7 AP article: “It’s going to be $3.50 per gallon this summer,” oil analyst Andrew Lipow said. “At the very least, you can expect prices to fall 40 cents or so over the next several months.”
  • Emerging markets are still growing: As I mentioned above, China is putting the brakes on its economy. But China’s economy is still expected to grow close to 10 percent this year. That’s a huge number.
  • The debt crisis will be dealt with: While politicians may take it down to the wire, they’ll probably approve an increase in our nation’s debt ceiling. And while the process of dealing with our massive budget deficit won’t be pretty, it’s a lot better for the country and the stock market than ignoring it.

In a January story called 3 Places to Put Money Now, I suggested putting money into stocks, real estate, and paying off debt. While paying off debt is always a great place to put money, my assumption regarding real estate was almost certainly too optimistic – at this point it looks highly improbable that housing prices will begin any sort of a turnaround this year. As for stocks, while the jury is still out, I’m concerned: I wasn’t expecting this degree of slowdown. But I’m still not throwing in the towel – yet.

Bottom line? Expect tough sailing in the immediate future and keep your eye on the news. If our economic recovery continues to falter, that’s going to be reflected as lower stock prices. Long-term, however, I’m still looking for stocks to do well. So if you’re putting money monthly into stock mutual funds at work or elsewhere, don’t stop. But don’t expect any easy money for the next few months.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
15 Purchases That Make Life Easier As You Age
15 Purchases That Make Life Easier As You Age

There are many products that can make getting older — or any time of life — a little easier.

7 Common Online Shopping Mistakes That Will Cost You
7 Common Online Shopping Mistakes That Will Cost You

How many of these costly online shopping missteps are you making without realizing it?

5 Reasons You Should Claim Social Security ASAP
5 Reasons You Should Claim Social Security ASAP

Experts often recommend postponing claiming your Social Security retirement benefits. But there are situations in which you should start taking the money sooner.

8 Products to Reduce Anxiety and Stress
8 Products to Reduce Anxiety and Stress

Current events have you feeling anxious? These Amazon products can take the edge off.

What Brand Makes the Best Rechargeable AA Batteries?
What Brand Makes the Best Rechargeable AA Batteries?

The best battery depends on what you need it for and how big your budget is. Here’s how to find the cheapest brand that will do the job you need.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
9 Mistakes Everyone Makes When Shopping on Amazon
9 Mistakes Everyone Makes When Shopping on Amazon

Are you losing money due to any of these missteps?

Can a Divorced Widow Claim Her First Husband’s Social Security Benefits?
Can a Divorced Widow Claim Her First Husband’s Social Security Benefits?

The rules are complicated when it comes to eligibility for survivors benefits.

8 Tips for Retiring Comfortably on Social Security Alone
8 Tips for Retiring Comfortably on Social Security Alone

It’s never too early to start learning how to live well while living on less.

Am I Eligible for My Mother’s Social Security Benefit?
Am I Eligible for My Mother’s Social Security Benefit?

Can an adult daughter tap into her late mother’s benefit?

6 Great Gifts on Sale at Amazon Today
6 Great Gifts on Sale at Amazon Today

As the holidays near, we’re highlighting some of the best deals on gift ideas.

27 Things You Should Never Pay For — and How to Get Them for Free
27 Things You Should Never Pay For — and How to Get Them for Free

When you know the tricks, you can save big on all kinds of useful things that others pay for.

11 Generic Products You Should Buy at Costco
11 Generic Products You Should Buy at Costco

Not all generics are worthwhile, but these are among the best from Costco’s Kirkland Signature brand.

This Deal Offers 85 Channels of Live TV for $10 Per Month
This Deal Offers 85 Channels of Live TV for $10 Per Month

You can start the new year off with some cheap entertainment — while the offer lasts.

15 Free Streaming Services to Watch While Stuck at Home
15 Free Streaming Services to Watch While Stuck at Home

These free movie streaming sites offer thousands of movies and TV shows, including recent releases and beloved classics. If you love free movies, online sites are where you need to look for the best list of features that are just one easy click away.

This Gas Station Scam Is Victimizing More Drivers
This Gas Station Scam Is Victimizing More Drivers

For the second straight year, a growing number of Americans believe they’ve fallen prey to this scam.

10 Things I Always Buy at Trader Joe’s
10 Things I Always Buy at Trader Joe’s

From snacks to sweets to side dishes, stock your cart with these time-tested favorites on your next TJ’s run.

9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

15 Amazon Purchases That We Are Loving Right Now
15 Amazon Purchases That We Are Loving Right Now

These practical products make everyday life a little easier.

4 Tax Credits That Will Be More Generous in 2021
4 Tax Credits That Will Be More Generous in 2021

If you are eligible for these tax breaks, they will slash your federal income tax bill — dollar for dollar.

6 Legal Documents Retirees Need — but Don’t Have
6 Legal Documents Retirees Need — but Don’t Have

Few retirees have all of these documents that are crucial to their golden years — especially during a pandemic.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

There are easy high-paying majors available in the U.S. — and no bachelor’s degree is required. We’re here to help you find easy degrees that pay well.

The Worst Day of the Year to Buy a Used Car
The Worst Day of the Year to Buy a Used Car

If you need a new set of wheels, avoid shopping on this day.

7 Stores That Match — or Beat — Amazon Prices
7 Stores That Match — or Beat — Amazon Prices

These retailers offer some of the most consumer-friendly price-match policies anywhere.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.