The stock market's dangers are easier to see now

  • By Jeff Sommer,
  • The New York Times News Service
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Project ahead a year or two: It is much easier to make a case for a troubled stock market than for a booming one.

Start with the performance of the market itself. Although stocks surged on Wednesday, a rocky autumn wiped out most of the year's gains, and investors are having difficulty mustering arguments for a market that has been unable to sustain upward momentum.

Paul Hickey, a founder of Bespoke Investment Group, an independent market research firm, regularly tallies what he calls "the pros and cons" of the stock market. I asked him for an informal update: He came up with 14 pros versus 22 cons.

That abundance of negativity isn't intended as a quantitative assessment of the market's prospects, but it does give a rough sense of his view and, I think, of the perspective of many skittish investors.

"We were bullish for a long time, but right now I'd say I'm in a wait-and-see mode," Mr. Hickey said. "I think it's a time to be cautious."

I also asked James W. Paulsen, chief investment strategist of the Leuthold Group, an investment research firm in Minneapolis, for his sense of the market. An economist, Mr. Paulsen is worried about stocks because he is worried about the economy, he said. While the United States is not in a recession now, he said, "we have moved into the ballpark of a recession."

Mr. Paulsen said neither he nor anyone else could reliably forecast a recession. "That kind of prediction is just too hard to do," he said. But, he added, it is possible to judge when the risks of recession have risen.

"It gets somewhat easy, with a little experience, to recognize when you're in the ballpark of a recession," Mr. Paulsen said. "That is where we are now, and that alone is quite a bit of information."

Given his current outlook, which is that the probability of a recession within two years is reasonably high though not certain, "this is a good moment to take a little risk out of your portfolio, just in case things turn down," he said.

The stock market, Mr. Paulsen said, often moves in advance of a recession — and a declining market can help cause a recession — making investment timing extremely difficult now. In this dangerous environment, he said, "right now, I'd be a little careful."

Mr. Hickey, too, advises caution, because when he enumerates the pros and cons for the market, the positive side is scanty. It includes factors like these:

  • Despite some difficulties, the gross domestic product in the United States rose at a 3.5 percent annual rate in the third quarter.
  • The Conference Board's Leading Economic Indicators index has been rising, which suggests that a recession is probably not imminent.
  • The yield curve — the difference between long- and short-term interest rates — remains in a bullish zone, although that positive margin has been narrowing and bears close watching.
  • The end of the Federal Reserve's interest rate tightening cycle may be in sight. Jerome H. Powell, the Fed chairman, said on Wednesday that interest rates were already close to a "neutral" level, which might imply that rates won't rise much higher.
  • Finally, there is already so much bad news about the stock market that it amounts to good news. According to contrarian logic, Mr. Hickey said, the negatives are baked into stock prices, so the market has room to rise.

That last item may be a stretch. It is an indication, he said, that he is having difficulty being upbeat.

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