After writing 5 reasons to be bullish on the stock market, I think I should play Devil’s advocate and bring 5 reasons to be bearish on the stock market ;-). I would say that it is probably the thing I hate the most about financial analysts and economists; they often have as many reasons to be bullish as they have to be bearish. In the end, you have to read between the lines to understand what their true feelings are about the economy. Well I’ll tell you upfront: I am bullish for 2011. However, as economists say, there are a few clouds on the horizon:
Bearish Reason #1: Inflation in China
Considering their current economic growth, inflation in China is just normal. However, since China’s inflation is around 5% lately, rumors of interest rate increases and protectionism rise along with inflation (look at the graph).
Since emerging markets growth (led by China & Brazil) is supporting the world’s economy, any news about restricting their economic pace will be bad news for North American stock markets.
Bearish Reason #2: Catastrophe & Politics
You have seen what happened in Japan (Catastrophe), Egypt and Libya (politics)? When we hear about catastrophe, we think about economic slowdown. Uncertainty in both cases (Catastrophe & political instability) has not been the best friend of the stock market. I guess this is why we saw a slump in the stock market each time we hear bad news about other countries.
Bearish Reason #3: Oil and other commodities’ prices rising
Speaking of which, political instability in Arab countries will obviously push the price of oil to higher levels. This is not a good thing for the overall economy as the cost of oil acts like a “natural” tax on the pockets of each individual. More tax = less money to spend = less economic growth. Obviously, investors don’t want to see that either ;-).
Bearish Reason #4: Europe and their tight budgets
Another reason why the world’s wallet seems smaller is the austerity measures in several European countries. While they live like irresponsible teenagers being sponsored by their parents, some of them have to face the results of their oversights. Generous social programs, pension plans and a lack of rigor in the tax authorities combined created a huge gap in the Governments’ budgets. They are currently cutting everywhere and there is nothing to help consumers’ spending! Here’s a picture illustrating how indebted some countries are:
Bearish Reason #5: US Employment and Housing prices
If you look at the US unemployment rate, you will notice that while the situation is better we are far from an employment boom:
This is the same thing when we consider new constructions (596,000 annualized as of March 2011 vs 2,100,000 at its peak a few years ago). In order to see the US market become more bullish, we will need stronger numbers from both employment and new constructions in the upcoming months.
Final thoughts: Bullish or Bearish?
As I have mentioned before, I do think that we will have a bullish 2011. However, it won’t be without market fluctuations. I think that we will have a strong VIX (volatility index)… and this will only create more investing opportunities ;-).