10 reasons for possible US market slump

1. The market is already expensive. Stocks are about 20 times cyclically adjusted earnings, according to data compiled by Yale University economics professor Robert Shiller. That's well above average, which, historically, has been about 16. This ratio has been a powerful predictor of long-term returns. Valuation is by far the most important issue for investors. If you're getting paid well to take risks, they may make sense. But what if you're not?


2. The Fed is getting nervous. The central bank recently warned that the economy had weakened, and it unveiled its latest weapon in the war against deflation: using the proceeds from the sale of mortgages to buy Treasury bonds. The move should drive down long-term interest rates. That's great news for mortgage borrowers, but it's hardly something one wants to hear when the Dow Jones Industrial Average ($INDU) is already north of 10,000.
 

3. Too many people are too bullish. Active money managers are expecting the market to go higher, according to the latest survey by the National Association of Active Investment Managers. So are financial advisers, reports the weekly survey by Investors Intelligence. And that's reason to be cautious. The time to buy is when everyone else is gloomy. The reverse may also be true.

4. Deflation is already here. Consumer prices have fallen for three months in a row. And, most ominously, the drop is affecting wages. The Bureau of Labor Statistics reports that workers earned 0.7% less in real terms per hour last quarter than they did a year ago. No wonder the Fed is worried. In deflation, wages, company revenues, and the value of your home and your investments may shrink in dollar terms. But your debts stay the same size. That makes deflation a vicious trap, especially if your among the people who owe way too much money.

5. Many people still owe way too much money. And not just households -- corporations, states, local governments and, of course, Uncle Sam owe, too. It's the debt, stupid. According to the Federal Reserve, total U.S. debt -- even excluding the financial sector -- is basically twice what it was 10 years ago: $35 trillion compared with $18 trillion. Households have barely made a dent in their debt burden; it has fallen a mere 3% from last year's all-time peak, leaving it at twice the level of a decade ago.

6. The jobs picture is much worse than they're telling you. Forget the "official" unemployment rate of 9.5%. Alternative measures? Try this: Just 61% of the population age 20 or over has any kind of job right now. That's the lowest since the early 1980s, when more women stayed at home by choice. Among men today, it's 66.9%. Back in the '50s, incidentally, that figure was around 85%, although allowances should be made for the higher number of elderly people alive today. And many of those still working can find only part-time work, so just 59% of men age 20 or over currently have a full-time job. This is bullish?

7. Housing remains a disaster. Foreclosures rose again last month. Banks took an additional 93,000 homes in July, says foreclosure specialist RealtyTrac. That's a rise of 9% from June and just shy of May's record. We're heading for 1 million foreclosures this year, RealtyTrac says. And naturally the ripple effect hurts all those homeowners not in foreclosure by driving down prices. See deflation (No. 4) above.

8. Labor Day is approaching. Ouch. It always seems to be in September-October when the wheels come off Wall Street. Think 2008. Think 1987. Think 1929. Statistically, there actually is a "September effect." The market, on average, has done worse in that month than any other. No one really knows why. Some have even blamed the psychological effect of shortening days. But it becomes self-reinforcing: People fear it, so they sell.
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9. We're looking at gridlock in Washington. Election season has begun. And the Democrats are expected to lose seats in both houses in November. (Betting at InTrade, a bookmaker in Dublin, Ireland, recently was giving the GOP a 62% chance of taking control of the House.) As our political dialogue seems to have collapsed beyond all possible hope of repair, let's not hope for any "bipartisan" agreements on anything of substance. Do you think this is a good thing? As Davis Rosenberg at investment firm Gluskin Sheff recently pointed out, gridlock is only a good thing for investors "when nothing needs fixing." Today, he notes, we need strong leadership. Not gonna happen.

10. All sorts of other indicators are flashing amber. The Institute for Supply Management's manufacturing index, while positive, weakened again in July. So did ISM's new-orders indicator. The trade deficit has widened, and second-quarter GDP growth was much lower than first thought. ECRI's Weekly Leading Index has been flashing warning lights for weeks (though the most recent signals have looked somewhat better). Europe's industrial production in June turned out considerably worse than expected. Even China's steamroller economy is slowing down. Tech bellwether Cisco Systems (CSCO, news, msgs) has signaled caution ahead. Individually, each of these might mean little. Collectively, they make me wonder. In this environment, I might be happy to buy shares if they were cheap. But not so much if they're expensive. See No. 1 above.

Source -articles.moneycentral.msn.com
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