Friday, May 29, 2015

Stocks Can’t Overcome These Four Headwinds.......A MUST READ!

Stocks Can't Overcome These Four Headwinds

Investors are just now starting to realize that a major 
correction is very likely. For the past five months, U.S. stocks have been in a rut.

Since Oct. 30, the S&P 500 Index has traded roughly between 2,000 and 2,100. Every time it hits a new record, profit taking has set in. The same is true for the Dow Jones Industrial Average, which has veered between 17,000 and a little over 18,000.

The Nasdaq Composite index, which retook the much-hyped 5,000 level it last reached in 2000, closed above that magic number only three trading days before it, too, promptly sold off.

What's going on? There's just not enough good news to drive stocks higher and not enough bad news to push them lower as bulls and bears fight for control.

Stocks face four distinct headwinds 
that investors are just beginning to grasp.

Headwind No. 1: Federal Reserve policy. 

Top Fed officials have made it very clear that the central bank is gradually moving to more "normal" interest rates from the near-zero federal funds rate that has prevailed for six years.

But as Fed Vice Chairman Stanley Fischer and Chairwoman Janet Yellen herself said in major speeches, the Fed will take its time getting there. And when it does raise rates, they won't get back to the 5% or so that used to be considered normal. Friday's "abysmal" jobs report may slow rate increases even more.

Headwind No. 2: The U.S. dollar. 

The U.S. dollar index, which tracks the greenback against several major currencies, has fallen quite a bit from its mid-March peak above 100. (It traded at around 97 on Monday.)

Don't expect that to continue. Japan remains a long-term basket case, and the European Central Bank is just starting its massive bond-buying program, which the Fed ended last year. Little by little, as the Fed tightens, investors will flock to the dollar again.

Also, for the first time in years, capital is flowing out of, not into, emerging markets. Some of that money will go to Europe, but much of it will flow to the U.S. and dollar-denominated instruments.

A strong U.S. dollar cuts import prices and reduces commodity prices, especially oil — good news for American consumers. But it also hurts large U.S. companies' overseas sales, nearly half the S&P 500 companies' 2012 revenues. 

Headwind No. 3: Earnings. 

For the first time in three years, analysts project earnings per share (EPS) for the S&P 500 will decline — by 3% in the first quarter, according to S&P Capital IQ, with only a 0.3% expected gain for the year.

Sam Stovall, S&P Capital IQ's U.S equity strategist, expects earnings momentum to decline as the year moves on, and of the 10 S&P sectors, he thinks only health care and industrials will show positive earnings growth.

Merrill Lynch analysts say big dollar moves of the kind we've seen lately have historically caused "earnings recessions" because foreign sales and earnings are worth less when translated back into dollars. As of last month, nearly one in five S&P 500 companies had warned of weaker earnings, many of them citing the strong dollar as the culprit.

Headwind No. 4: Fiscal troubles ahead. 

For the past 3 ½ years, the U.S. fiscal outlook has improved. Deficits have shrunk, and the budget battles that led S&P to downgrade the U.S.'s AAA rating seemed to be manageable, if not abating. 

But that brief spring may give way to a perfect storm. In October, Congress and President Obama will grapple with a new budget resolution; the dreaded "sequester," which the president and GOP war hawks both hate, and the need to raise the debt ceiling. That raises the prospect of a government shutdown or even another flirtation with debt default this fall.

Right now, the market doesn't look strong enough to overcome them, at least in the short run. Of such stuff are corrections made, and investors need to pay attention and be prepared.

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