Takin A Step Back

I've been pretty up beat on the economy and on the outlook for U.S. stocks for quite some time...three weeks ago I thought the markets were going to rally to the upside following the horribly ugly month of may, and they did (guess I got lucky on that call).  But now, in leu of recent economic releases and new developments out of Europe, I've become more cautious and concerned on the direction of the U.S. economy and stocks in general. 

Here are four reasons I'm having to take a step back and reevaluate my outlook for stocks and the U.S. economy:

• Economic conditions in the U.S. and elsewhere are deteriorating. A worldwide economic slowdown is taking hold now. Though I continue to expect a slow pickup in economic growth, the rate of decline is slightly worse than I previously thought; this is most likely the result of monetary inaction by the Federal Reserve (government in general) and the economic and financial crisis taking place in Europe. Yesterday the Fed reduced its 2012-2013 economic growth forecast (by about 0.5% per year) and slightly raised its projections for unemployment compared to its previous expectations in April (recent job data has not looked so hot). On top of that, economic numbers out of China and Europre signaled slowing worldwide growth.
• The corporate profit growth outlook is eroding. Yesterday Proctor and Gamble (which is of course a huge consumer products conglomerate), had horrible earnings which reflected a massive slowdown in world wide consumer demand and I'm concerned that their poor earnings and forecasts numbers could be foreshadow more decelerating profits. While the rapid drop in the price of energy products, which will help increase corporate profits and improve the consumer's well-being, I still think we could see corporate earnings releases fail to meet expectations. 
• Little progress has been made in Europe (of course). For now, eurozone leaders and central bankers have failed to implement bona fide fiscal reform and effective monetary policy in order to stabilize the financial debt crisis. More importantly, Europe as a whole is far removed from addressing its long-term problems.
• The impact of domestic monetary policy is lacking.  While the historically low interest rates have most definately helped the U.S. consumer (whether in buying houses/cars or paying their credit cards), I am concerned that the low rates can only do so much - if you fish a pond too much sooner or later all the fish will be gone.  Added to that, our politicians still appear divided and refuse to work together. Those wonderful folks in Washington, D.C., who couldn't agree on the financial budget 10 months ago (which brought the U.S. stock market to its knees in August 2011), continue their dysfunctional, divided, and selfish ways. It seems more likely now that our leaders will wait until the last moment to address the upcoming budget deadline as political rhetoric grows more heated into the November election. (A positive for the stock market, and having nothing to do with my political views, is that Romney's campaign seems to be gaining traction - and stock market traders/investors believe he is more business friendly than Obama).

I'm not trying to be overly negative and I'm not changing my overall positive outlook on U.S. stocks and our economy, I'm just being honest in acknowledging what could negatively affect us going forward. 

As Shakespeare said, "To Thine Own Self Be True"...I just hope I'm wrong.

My next post will be more upbeat!