What is the Biggest Threat to the Markets?

Todd’s most recent post regarding fund flows was an interesting piece, but even with the outflows that he outlined, the market still marches higher (even with the recent weakness).

Frankly I think fund outflows are where the “dumb, slow” money focuses most of their energy. ETFs, ETNs and other similar products along with the equities themselves are where Wall Street’s elite focus most of their energy and funds.

If everyone were fleeing equities for bonds over the past year we wouldn’t have had the 26% gain in the S&P 500.  So we know that most investors (at least a small majority) are believers, but what’s going to be the “gotcha” that takes this market down, if any at all?

#1 – China

China’s slowing growth has already been factored in to extent.  Chinese markets are at lows not seen since 2009 and many commodities like steel and aluminum have severely corrected to account for the decrease in demand.

Some were calling for an average of 7% growth to remain for the next 10 years, but I think that won’t be the case.   I believe that there is so much excess China and they are reaching an inflection point.  Waning demand from the U.S., Australia, Europe and others will pull Chinese growth and demand lower and sink commodities lower (save natural gas and a few others).

I think a hard landing is almost inevitable and will be exacerbated by further consumption deterioration and a long recovery in the Euro Zone.

China and all the value attached to it still holds a lot of water for global growth.

#2 – Fiscal Cliff

First there is the event itself, which will generate an enormous amount of headline volatility. Even hough I believe the U.S. Government will tackle the issue, there are the effects of output losses and stress on an already stressed consumer.

I believe that the cliff will reduce GDP substantially in Q12013 in addition to the bearish effects it will have on hiring and perhaps spending in the holiday season as the media begins to disseminate data to the masses.

#3 – Earnings

Q3 expectations are extremely low; in fact analysts are expecting a 2.7% drop in year over year earnings growth, but Q4 expectations jump to a 9.5% increase and FY 2013 expectations are for 11.2% growth (consensus).  I am still unsure about how that’s going to happen.

Consumers are still nervous and not spending as they have in past recoveries and I’d say we are far from confident in the future of the U.S. economy (at least 3-9 months out).

With the GDP and durable goods readings we saw this week, a housing market that is just beginning to stabilize and companies that are operating at peak margin, many of which are still reducing their workforce…where does the growth come from?

#4 – Europe

Europe is more of a headline risk than anything.  Barring a complete breakup of the Euro-Zone (I do think Greece will go), I don’t think that Europe posses any serious risk to the markets over the next 6 months other than volatility.

What do you all think about these risks and their hierarchy?  Do you have more? Less?  Do you believe they should be arranged differently?

For me, I believe that markets will struggle for the coming months, but certain key companies (I love mobile broadband infrastructure) will fare relatively well.

I want to hear your thoughts!