Wed 27 Jul 2011
6 Reasons Why There Could Be A Market Sell Off In The Second Half
Posted by Robin Bal under Investing , Stock MarketsAdd Comment
A Stock Market sell off may be about to begin which could take the Index lower for the full year. These six reasons demonstrate why one of the most impressive stock market runs may have ended:
1. Markets can’t rise all the time. This probably is obvious to most people. A significant is what a market requires to go higher for a market which has more than doubled in two years. Recent economic news shows that support to be lacking. The S&P has risen to more than double from 683 in March 2009 to almost 1,400 two months ago.
2. Corporate earnings have been pressured by an economic slowdown and margin drops. Many companies in the retail, transportation and manufacturing sectors counted on low commodities prices back in 2009 and 2010 to help profits. That help is gone. Oil has rallied from below $50 in mid-2009 to almost $100 recently. The price is down from $110, but it is still historically high. Prices on cotton and many agricultural commodities have also risen in the same period. The result: The cost of making and moving goods is higher, and margins on items like clothing have dropped.
3. Consumer sentiment has faltered. Recent data from from the Conference Board said “Consumer Confidence Index, which had declined in May, decreased again in June. The Index now stands at 58.5 (1985=100), down from 61.7 in May.” Many retailers have posted slow same-store sales. Activity at the world’s largest retailer, Walmart (WMT), has been down on a same store basis for its U.S. operations.
4. The improvement in unemployment has stopped. There were signs of a recovery in the job market in the first quarter and the unemployment rate dropped below 10%. May figures showed improvement in unemployment slowing as the economy added only 58,000 private-sector jobs. The carefully watched ADP data numbers confirmed the problem. Weekly initial jobless claims are still above 400,000 most weeks, a sign the June unemployment figures are likely to be poor. One of the worst drags on the economy — long-term unemployment, which is measured by those out of work for more than 26 weeks — has risen to over 6 million people. Most of these are close to the end of receiving unemployment payments, which means in a large sense, they will cease being consumers at all.
5. Housing prices are still falling. Americans counted on home equity to fuel their lifestyles in the 2004 to 2006 period. That ended as home prices fell sharply into 2010. S&P Case-Shiller data shows that home prices in the 10 largest and 20 largest cities continue to drop. Economist Robert Shiller expects the slide to continue into 2012. Over a quarter of U.S. mortgages are underwater, which means most of their owners cannot afford to sell them even if they need to as a way to cut living costs.
6. GDP rose less then 2% in the second quarter. It’s the most comprehensive single measurement of the economy’s health, and more and more economists have revised estimates for second-half growth down. The problem may be long-lived. The IMF just issued a report which said U.S. GDP growth will probably be below 3% through 2016.
Beyond those six negatives, there are not many reasons left to support an ongoing market rally. Instead, the signs say a sell-off is probable.