Stock Watch
5 Big Risks to Your Portfolio Now
Despite the market's rebound and the recession's likely end, dangers still lurk for stocks.
By Andrew Tanzer, Senior Associate Editor, Kiplinger's Personal Finance
August 24, 2009
The stock market seems to think everything is rosy. The nasty recession is quite likely over. Between the March 9 low and August 23, Standard & Poor's 500-stock index returned a remarkable 53%.
As gloom gives way to euphoria, it is worth leaning against the wind a bit and pondering some of the potential risks on the landscape. Here, we outline five of them.
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Economy. No question, the economy is crawling out of an especially severe recession. But how vigorous and sustained will the recovery be? The market is assuming that a lot will go right.
Bob Doll, vice-chairman of money-manager BlackRock, thinks that lingering debt problems will cause economic growth to be less than half the norm coming out of a deep recession. The recovery, such as it is, owes much to government fiscal and monetary stimulus, the effects of which will likely fade next year. Goldman Sachs is projecting that economic growth will be 3% in the second half of 2009 but decline to just 1.5% for the second half of 2010. That doesn't sound too bullish for corporate earnings.
Consumer. It's hard to imagine a robust economy without a chirpy consumer. After all, consumers account for 70% of demand. But more Americans are in a frugal mode, paying down debts, increasing savings and repairing their busted household balance sheets.
This will be a multiyear process. Merrill Lynch calculates that for households to return to the late 1990s debt levels (pre-credit bubble, but still elevated by historical standards), the extinguishment of $4.35 trillion of debt-more than 30% of the outstanding balance-will have to take place. A less leveraged, more frugal consumer will weigh on earnings.
Real estate. Yes, home sales have bottomed, and new-home construction will rise from its deep hole. But some things are still getting worse: More than one in eight homeowners with a mortgage were delinquent on the loan or in foreclosure at the end of June, a record level. Unemployment-related foreclosures on prime mortgages are rising sharply.
And let's not forget about commercial real estate, which entered a down cycle much later than residential real estate. The default rate for commercial mortgages is on a steep climb. There were simply too many shopping malls, office buildings and hotels constructed during the boom years. Banks, still trying to recover from the residential market collapse, will take another hit here.
Interest rates. You would expect rates to rise in an improving economy, but there's an additional factor at work this time: the frightening federal budget deficit. The Obama administration is forecasting a $1.84-trillion gap for the fiscal year that ends September 30, almost four times last year's deficit and equivalent to 13% of gross domestic product Investors, including foreigners, are likely to demand higher yields in the months ahead.
China. Bubblemeister Alan Greenspan was of the view that you can't identify a bubble until it's too late. Well, the former Fed chairman is entitled to his opinion, but Chinese authorities already seem to be worried about a bubble forming in their country's asset prices.
These prices have been inflated by easy credit and a massive government stimulus package to offset the collapse of export markets. The Shanghai market doubled from last November to early August, before retreating 20%. Share turnover on some days has been higher than that of the New York, Tokyo and London markets combined. The money supply is growing rapidly.
It is easy to imagine the Chinese authorities moving aggressively to deflate a bubble by curbing lending and jacking up interest rates before things get out of control. Global stock markets seem to move in sympathy these days, so the U.S. would not escape the impact.
No one knows for sure what the stock market will do in the future, especially over the short run. But with so much out there that could go wrong, this might not be a bad time to take some money off the table.
Reader Comments (8)
Posted by: tbain at 08/24/2009 05:01:37 PM
If I take money off the table, how do I determine when to put it back on?
Posted by: Thomas Gurley at 08/25/2009 11:07:19 PM
It is nice to take some money offhe but where do you put it to get a resoable return?
Posted by: faith at 08/26/2009 07:47:15 PM
tbain and Thom, precisely my questions. Anyone have an answer, we would love to hear, right guys.
Posted by: Bob at 08/27/2009 11:38:19 AM
Thanks for the reality check but I can think of a lot more than 5 big risks. How much of this number growth will be simply nothing more than inflation?????
Posted by: Andrew Tanzer at 08/27/2009 04:31:12 PM
This is Andrew Tanzer, the author of this article. We don’t know what the markets will do short term, but, if these risks have got you worried, you may want to take certain steps to reduce your exposure to stocks. I suggest that it's a good time to review your allocation of assets. You should establish a clear asset allocation strategy before you start investing. This should reflect your individual circumstances, such as risk tolerance, investment time horizon and near-term cash needs. If, for example, your stock allocation model is 65% but your stock exposure has now moved up to 75%, then it may be time to rebalance and shift some stock money to other asset classes.
Posted by: Jean Smith at 08/31/2009 10:03:07 PM
I have been in the market for 44 yrs,and can tell you it is the place to be.In good and bad times patience is the name of the game.I have traveled the World on my gains.I have also accumulated some of Warren Buffett's Hathaway shares. I never touch this money.Some winnings I save,some I spendKeep the faith.I bought Dendreon years ago for$6.75 and just put it awaylook attodays price. It more then covered all my losers.It all comes down to homework.There are lots of fine companies out there. Look @ Nestle I bought that on the pink sheet years ago for $25.00 per share, Pays a good dividend and has split a couple of times. This has become my hobby, Make it yours.
Posted by: Joe at 09/01/2009 12:01:14 PM
Jean, no offense but the market is very different today than it was 40 years ago. The profound amount of greed, speculation, and corruption in the markets today is killing us. Not to mention many of us don't have 44 years to burn while we recoup our losses from 2008. Some people just entered the market in the last few years, and were rewarded with 40% erosion of their nest eggs. Your Dendreon play, it's great that you bought it years ago and it's up, however before this insane and unjustly inflated rally you were down almost 50% in that same play you're bragging about now. Andrew, exactly what other asset classes do you recommend? Munis aren't attractive, Gold is too expensive, CDs rates are terrible. In my opinion I'd rather short the market and/or build positions in heavily defensive dividend payers like JNJ, ABT, PEP, etc. If one doesn't want to participate right now, I'd recommend sitting on cash.
Posted by: matt at 09/21/2009 12:09:37 AM
yep-Jean brags of a stock that tanked rather beyond the beyond. From around $22 per shr. down to $4 per share then back up to what? $16? DNDN is not a good buy now nor then. Maybe 44 years ago it was. Good 4 u Jean, hope your other picks continue to do as well. Pure luck though and not homework at all. FDA controlled the movement of this and all other drug stocks.