The stock market seems to think everything is rosy. The nasty recession is quite likely over. Between the March 9 low and Aug. 23, the Standard & Poor's 500 Index ($INX) returned a remarkable 53%.
As gloom gives way to euphoria, it is worth leaning against the wind a bit and pondering some of the potential risks on the landscape.
Here, we outline five of them:
The economy
No question, the economy is crawling out of an especially severe recession. But how vigorous and sustained will the recovery be? The market is assuming that a lot will go right.Bob Doll, vice chairman of money manager BlackRock, thinks that lingering debt problems will cause economic growth to be less than half the norm coming out of a deep recession. The recovery, such as it is, owes much to government fiscal and monetary stimulus, the effects of which will likely fade next year. Goldman Sachs is projecting that economic growth will be 3% in the second half of 2009 but decline to just 1.5% for the second half of 2010. That doesn't sound too bullish for corporate earnings.
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Consumer spending
It's hard to imagine a robust economy without a chirpy consumer. After all, consumers account for 70% of demand. But more Americans are in a frugal mode, paying down debts, increasing savings and repairing their busted household balance sheets.This will be a multiyear process. Merrill Lynch calculates that for households to return to the late-1990s debt levels (pre-credit bubble, but still elevated by historical standards), the extinguishment of $4.35 trillion of debt -- more than 30% of the outstanding balance -- will have to take place. A less leveraged, more frugal consumer will weigh on earnings.
Real estate
Yes, home sales have bottomed, and new-home construction will rise from its deep hole. But some things are still getting worse: More than one in eight homeowners with a mortgage were delinquent on the loan or in foreclosure at the end of June, a record level. Unemployment-related foreclosures on prime mortgages are rising sharply.
Video: Is the recession really over?
And let's not forget about commercial real estate, which entered a down cycle much later than residential real estate. The default rate for commercial mortgages is on a steep climb. There were simply too many shopping malls, office buildings and hotels constructed during the boom years. Banks, still trying to recover from the residential market collapse, will take another hit here.
Continued: Interest rates and China
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