Welcome to the first item that could derail the market – disappointing corporate profits. Speaking of profits, here is another: profit-taking. After this recent run, few will be able to resist taking some money off the table. And whenever the urge to sell is greater than the urge to buy, stock prices invariably take a header.
Another caution sign is that nearly everyone expects another gain for stocks this year – especially after the last three – and that makes it all the more likely that the market may not cooperate.
What makes this year different from those of the recent past is the fact that the Federal Reserve is no longer actively seeking to keep the market afloat by making it extremely cheap for business to borrow money.
In anticipation of this, long-term interest rates have jumped by a full percentage point, underlining the need on the part of investors to minimize risk-taking. As a result, housing, a key support for this economy, appears to be slowing.
In conducting its tapering program, the Fed could easily misjudge the strength of the economy if it places too much emphasis on the unemployment rate and not enough on the employment rate.
The reported rate of unemployment could fall reflecting mainly people giving up looking for work, rather than finding jobs. The low level of the employment rate in the face of a fall in the unemployment rate would seem to bear this out.
If you are looking for reasons to be less bullish this year, you need look no further than Washington. Although all is quiet inside the Beltway for the moment, it would not take much for partisan politics to flare up and inject new monkey wrenches into the economic outlook.
There could be trouble in other countries, such as wars, currencies and the like. Back home, there could be something completely unexpected, like another recession.
One thing seems certain: stocks are unlikely to be as buoyant in the New Year as they were in the old. Let’s hope that at the very least they can stay afloat.
Irwin Kellner is MarketWatch's chief economist.
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