Don’t Jump into Stocks Without Considering Current Risk Factors

stock market riskMarkets appear to have found some legs after trading largely in the red from late July to late August. The major stock indices have closed higher in five of the last six sessions to September 3. With the buying, the DOW and Russell 2000 have moved into positive territory this year. More importantly, all four of the key indices we follow, including the S&P 500 and NASDAQ, have broken above their respective 50-day moving averages (MAs). This is positive, but what we want to see is a sustained move above the 200-day MA on higher trading volume.

Before you jump in full throttle, be careful, as the risk remains above average. There is evidence of stalling in the global economies of China, Japan, and Europe. The fear is that stagnant growth could lead to another recession in what is termed a “double-dip” recession. Investment guru Nouriel Roubini estimated the probability of a double-dip recession in the U.S. at over 40%. The revised second-quarter GDP came in at 1.6%, below the initial 2.4% estimate. The Goldman Sachs Group Inc. (NYSE/GS) estimates the chances of a double-dip recession at around 30%. Overseas in Japan, the world’s third largest economy, there are renewed fears of another recession. The news reignited fears of a double-dip recession over here. On a positive note, there was encouraging news out of China, with the manufacturing and autos increasing in August. The data will help to alleviate some concern of slowing in China, which has hampered markets. While the odds do not favor a return to a recession, it is still worrisome.

In the U.S., the economic picture is encouraging, albeit the strength of the economic renewal is at risk. In the troubled housing market, the Case-Shiller 20-city Index, a key barometer of home prices across the nation, surged an encouraging 4.23% in June. This was better than the 3.1% estimate, but down from the 4.64% reading in May. The Consumer Confidence reading for August was positive at 53.5, higher than the 50.0 estimate and 51.0 in July. The ISM Index was strong at 56.3 in August, up from July and well above the estimate of 53.0. It was the 13th straight month of expansion. The reports are encouraging for the economy, but before we see sustainable buying, we need to see job creation.

The non-farm payrolls for August showed the loss of 54,000 jobs, much better than the estimate of 120,000 jobs lost and same as the revised 54,000 in July. The unemployment rate edged up to 9.6%. While the lower jobs losses rate is positive, the reality is that there was no job creation; this is an issue that needs to improve as we moved forward. Without jobs, housing and consumer spending are negatively impacted, as consumers will continue to be hesitant on spending.

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The newswires are talking about the cheap valuation of stocks versus historical comparisons, but I feel that, while this may be the case, the mixed revenue picture is a real concern. We are not getting a consistent increase in revenues or the growth is marginal. In order to feel more confident, revenue growth needs to be strong. Intel Corp. (NASDAQ/INTC) made a downward revision in its revenue guidance for the important third quarter, saying that the demand for PCs has been soft. Since Intel supplies chips to about 80% of the world’s computers, this is not a good sign. Add in the previous comments from bellwether stocks General Electric Co. (NYSE/GE) and Cisco Systems Inc. (NASDAQ/CSCO) and you’ll understand the potential problems that still exist in the economy and corporate America.