The stock markets have been on a tremendous run over the last six months – but a large group of investors is still sitting on the sidelines, watching nervously and refusing to put their money back into the markets.
Part of the problem is the positive economic reports and forecasts of recent weeks haven't made most consumers feel better about anything regarding their personal financial situations. And to top it all off, news of rising food and gas prices, widespread unrest in the Middle East and looming state budget cuts have heightened fears that economic conditions are bound to become worse.
Not Confident About Consumer Confidence
"John Q. Public is not feeling the same thing the government is saying about there being no inflation, and that consumer confidence is high," says Ken Polcari, managing director of broker dealer ICAP LLC (IAPLF). "Every day they see the price of food and gas keeps going up. If you have to spend more money on food and energy, you have less money to spend on everything else."
Polcari, who trades equities on the floor of the New York Stock Exchange, believes keeping in touch with how average Americans feel about economic events can often provide clues to where the markets are headed. And while he remains optimistic that long-term market trends will be positive, Polcari believes consumer angst and nervousness over world events may soon start to influence short-term market movements.
Investors may want to take note -- because if consumer confidence starts waning, the economy and financial markets might swoon along with it.
In his daily blog to clients recently, Polcari listed his top nine reasons investors are nervous now:
1) What will the end of QE2 mean for the markets?
The end of the second round of quantitative easing (QE2), the Federal Reserve's massive $600 billion capital infusion into the financial markets, presents a major concern for investors. Stocks have risen nearly continuously since the program first announced in August 2010. So, it can be argued this is a "Fed-induced" rally -- and that market confidence will disappear in June when QE2 is set to end. "Unless the market is healthy enough and strong enough to support itself, you would expect the market to pull back," says Polcari.
2) The looming federal government shutdown.
Now working with a two-week reprieve, Democrats and Republicans continue their threats to walk away from the table as they fight over budget cuts. While it's unlikely either side will shut down the government, some investors shudder to think of the chaos and market mayhem that could ensue if they did -- concerns like a scuttling of the economic recovery, massive layoffs and a ripple effect of state government shutdowns due to discontinued government funding.
3) Political unrest in the Middle East and the effect on oil prices.
The markets are already affected by instability and tensions in the Middle East. "It creates nervousness -- people are going to sell their equities and put the proceeds into cash or gold," says Polcari.
Rising oil prices have sparked market sell-offs -- because the escalating price of oil is causing nearly everything to increase in price worldwide. Transportation costs, airline prices, creation of food and energy as well as the production of thousands of products are all increasing due to the disruption of oil supplies.
4) Political unrest in the U.S. as states battle unions over pay and benefits.
With 40 of the 50 states dealing with budget woes, fights over pension and health care benefits may have a major impact on whether states can balance their budgets or go into default. The battles with unions in Wisconsin and Ohio will are being watched carefully. "That is potentially going to cause a ripple effect through a number of states," says Polcari. "If they succeed in curtailing collective bargaining rights, other states are going to get on that bandwagon."
5) Recently downgraded GDP numbers.
The downward revision of U.S. gross domestic product projections isn't a good sign, and if oil prices continue to spike, GDP may be revised even lower. If GDP gains falter, confidence will wane and markets will react badly.
6) Continued housing market weakness.
Residential real estate isn't getting any better -- and with energy prices going up, property taxes increasing and home values still dropping, there's less incentive to buy a home now than in years past. If interest rates begin to rise, new mortgage costs will rise as well – which will keep the housing market subdued. It's hard to see a strong recovery without housing.
7) Worldwide inflationary pressures.
Although the Fed says U.S. inflation is low, people in other parts of the world are feeling its wrath -- in the form of skyrocketing food and energy prices. The result? "People are rioting," says Polcari. Political unrest is sweeping across the Middle East at least in part because people can't take care of their families as prices skyrocket. Don't think it can't happen here.
8) Continued high unemployment and lack of job creation.
Until the unemployment rate falls below well below 9% (February's report finally squeaked past the 9% mark at 8.9%), most people will continue to believe the current administration has failed to create an environment that can support strong job creation. Without job creation, markets are likely to sputter.
9) The continuing European debt crisis.
While this crisis may have fallen off the media's radar screen for the past month, the debt problems of Portugal, Ireland, Greece and Spain haven't been resolved. A default by any one of these nations would shock world markets.
All of these issues could have serious ramifications for U.S. stock markets, but there's no certainty that any one of them will unfold in a negative way. In fact, the stock markets have continued to rally in spite of most of the nine issues mentioned. Investors can only hope that trend will continue.