The four-year-old bull market appears to have plenty of life left. From the bear market's bottom in March 2009 through February 1, Standard & Poor's 500-stock index returned a sturdy 143% (or 26% annualized). And yet, stocks still represent good value, selling at an average of just 13 times next year's estimated earnings, below the ten-year average of just over 14. Market strategist Ed Yardeni thinks the S&P 500 could close at 1665 by year-end, a 10% gain from its February 1 close.
But that doesn't mean stocks won't pause or even stumble along the way. Here are the key risks that could derail the market.
1. Irrational Exuberance
Given the stock market’s sharp advance since mid November, a pullback of 5% to 10% could occur at any time. Such retreats occur in the normal course of bull-market sprints. But if stocks keep rising too far too fast — say, the Dow Jones industrial average sails well beyond 15,000 by midyear — then a deeper pullback could ensue as fears of another bubble emerge.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
2. Global Uncertainty
Crisis fatigue and austerity backlash in the euro zone could undermine aid for struggling countries, such as Greece, and reignite Europe’s financial crisis. If China’s annual growth rate drops far below its expected 8%, it could put a serious dent in the global economy. Plus, turmoil in the Arab world makes the always worrisome Middle East more dangerous than usual.
3. Rate Squeeze
The Federal Reserve says it won’t consider hiking interest rates until the jobless rate drops to 6.5%. That might not happen until 2015. But strong growth in payrolls (or other signs of an overheated economy) or a surge in inflation (oil prices are up $10 per barrel since November) could bring higher rates sooner. So could a change in policy when chairman Ben Bernanke steps down in 2014.
4. Fiscal Woes
If ongoing debate in Washington, D.C., is marred by budgetary brinksmanship, and a deeply divided government keeps lurching from one crisis to another, confidence in the U.S. economy could be undermined, America’s debt rating could again be downgraded, and the stock market could take a shellacking. Leaving too much unsettled will heighten uncertainty, which investors hate.
-
Stocks Keep Climbing as Fed Meeting Nears: Stock Market TodayA stale inflation report and improving consumer sentiment did little to shift expectations for a rate cut next week.
-
Your End of Year Insurance Coverage Review ChecklistStop paying for insurance you don't need and close coverage gaps you didn't know about with this year-end insurance review.
-
Crypto Trends to Watch in 2026Cryptocurrency is still less than 20 years old, but it remains a fast-moving (and also maturing) market. Here are the crypto trends to watch for in 2026.
-
If You'd Put $1,000 Into Coca-Cola Stock 20 Years Ago, Here's What You'd Have TodayEven with its reliable dividend growth and generous stock buybacks, Coca-Cola has underperformed the broad market in the long term.
-
If You Put $1,000 into Qualcomm Stock 20 Years Ago, Here's What You Would Have TodayQualcomm stock has been a big disappointment for truly long-term investors.
-
If You'd Put $1,000 Into Home Depot Stock 20 Years Ago, Here's What You'd Have TodayHome Depot stock has been a buy-and-hold banger for truly long-term investors.
-
If You'd Put $1,000 Into Bank of America Stock 20 Years Ago, Here's What You'd Have TodayBank of America stock has been a massive buy-and-hold bust.
-
If You'd Put $1,000 Into Oracle Stock 20 Years Ago, Here's What You'd Have TodayORCL Oracle stock has been an outstanding buy-and-hold bet for decades.
-
If You'd Put $1,000 Into Sherwin-Williams Stock 20 Years Ago, Here's What You'd Have TodaySherwin-Williams stock has clobbered the broader market by a wide margin for a long time.
-
If You'd Put $1,000 Into UnitedHealth Group Stock 20 Years Ago, Here's What You'd Have TodayUNH stock was a massive market beater for ages — until it wasn't.
-
If You'd Put $1,000 Into Berkshire Hathaway Stock 20 Years Ago, Here's What You'd Have TodayBerkshire Hathaway is a long-time market beater, but the easy money in BRK.B has already been made.
