The market is up, but in an economy with high unemployment, a housing market in the beginning stages of recovery and a eurozone that remains volatile, the bull market of 2012 could quickly come to an end. Anything from a technical market correction to geopolitical concerns could derail what some economists believe to be a Fed-induced bull market.

Overbought Market
2012 has been the year of the bull. With the S&P 500 up more than 12% in 2012, investors who have ignored short-term dips and held to a bullish strategy have done quite well. As the market has moved higher, an increasing amount of analysts have called for a market correction. Some believe that a short-term correction of 3 to 5% is imminent, while others predict that catalysts coming in the next couple of months could cause market turmoil.

If a large-scale correction were to occur, retail investors who have just recently returned to the market could again pull their money and miss the next move to the upside. Bank of America Merrill Lynch's head of U.S. Equity and Quantitative Strategy Savita Subramanian is calling for the S&P to reach 1,600 by the end of 2013.

Eurozone Troubles
Markets have enjoyed an impressive move to the upside, due in part to a stable eurozone. Although still volatile, the eurozone has received relatively little airtime in the financial media compared to recent years.

Spain, the eurozone's fourth-largest country, is now the country that investors are watching. In June, the country secured a $100 billion bailout for their banks, but the nation still faces a deep recession with high unemployment and a housing market that hasn't recovered.

The market has shrugged off much of the news from the eurozone in 2012, but investors still keep a watchful eye on the unfolding events and may be willing to sell en masse if an alarming headline hits the news wires.

Gas Prices
Consumers spent more in the month of August, and while that should be good for the economy, getting past the headline reveals an ominous reason for the increase. Higher gas prices accounted for increased spending, while lower average wages in August made the headline more worrisome than optimistic.

Economists agree that the economy is growing but still faces significant risk if gas prices continue to rise or stay at levels at or near $4 per gallon for a sustained period.

Iran and Israel
Israel is worried about Iran. They're so worried that at a recent U.N. General Assembly meeting, Israeli Prime Minister Benjamin Netanyahu said that Iran would have the capability to build a functioning nuclear weapon by next summer. Iran said that if Israel were to attack, they would retaliate against Israeli and U.S. targets. Gen. Amir Ali Hajizadeh of Iran's aerospace division said that an attack would trigger World War III.

Any significant escalation of tensions between the two countries could trigger a stock market decline and military force would likely cause havoc on equities and commodities markets around the world.

The Fiscal Cliff
According to Reuters, if the fiscal cliff isn't averted, it could cut world earnings in half. The fiscal cliff is a combination of tax increases and spending cuts set to go into effect for 2013. If Congress fails to act, payroll, income and investment taxes are set to rise, unemployment benefits will fall and automatic budget cuts are set to take effect. In total, $607 billion will be slashed from the budget, but it would reduce U.S. growth by $800 billion.

The Bottom Line
The market may be up double digits in 2012, but significant near-term risks remain. Some market pros have reduced their exposure to protect against a market correction. Many of these events may not materialize, but retail traders with a shorter-term time horizon should have a hedging strategy to protect against these scenarios.

Related Articles
  1. Budgeting

    Is Living in Europe Cheaper than in America?

    Learn how living in Europe has financial advantages over living in the United States. Discover the benefits to take advantage of when it makes financial sense.
  2. Personal Finance

    5 Places Where Your Travel Dollar Goes Furthest

    The dollar is pretty strong right now, but where is it strongest? Canada? South Africa? Europe? Here are five places to travel to right now on a budget.
  3. Forex Education

    Four Currencies Under the Spotlight in 2016

    With currencies having become the “tail that wags the dog,” in terms of their impact on the global economy, these four currencies will be under the spotlight in 2016.
  4. Investing

    Which Countries Will Drive Global Growth in 2016?

    Given the volatility that has already shaken the global economy, the world's largest economies will be leaned on to stimulate growth in 2016
  5. Investing

    2 Opportunities Amid Today’s Market Volatility

    As you prepare your portfolio for the market volatility ahead this year, here are a few investing ideas to consider.
  6. Economics

    A Brief History of International Trade Agreements

    Since the mercantilist era, world trade has become increasingly multilateral, but since WW2 there has been a definite rise in regional trade agreements.
  7. Economics

    The Marshall Plan and the Revitalization of Post War Europe

    The Marshall Plan helped revive the economies of Western Europe after WWII largely by reforms that created greater economic cooperation in the region.
  8. Mutual Funds & ETFs

    The Top 5 ETFs to Track the Euro Stoxx 50 for 2016 (FEZ, HFEZ)

    Learn about a handful of the world's top ETFs designed to provide exposure to large-cap eurozone equities through the EURO STOXX 50 Index.
  9. Mutual Funds & ETFs

    VEA: Vanguard MSCI EAFE ETF

    Learn more about Vanguard's index-shifting, low-cost and non-U.S. market exchange-traded fund: the FTSE Developed ex U.S. Markets ETF.
  10. Economics

    Can the Global Economy Keep Going?

    It’s becoming increasingly difficult to make sense of the conflicting signals coming in about the state of the global economy.
  1. In what ways does Bayesian probability support the probability default model when ...

    During the European debt crisis, several countries in the Eurozone were faced with high structural deficits, a slowing economy ... Read Full Answer >>
  2. How do wholly owned subsidiaries operate in the European Union?

    Regulatory authorities in the European Union (EU) are suspicious of wholly owned subsidiaries, or at least their relationship ... Read Full Answer >>
  3. What are the most common market indicators to follow the European stock market and ...

    Market indicators can be used by technical analysts to measure the movements of major exchanges or indexes. Almost all market ... Read Full Answer >>
  4. Why doesn't England use the euro?

    England, as part of the United Kingdom, is the most notable member of the European Union that has elected not to use the ... Read Full Answer >>
  5. What are austerity measures?

    Austerity measures are attempts to significantly curtail government spending in an effort to control public-sector debt, ... Read Full Answer >>
  6. Why did the Department of Justice launch an inquiry into the sale of ImClone shares ...

    On December 28, 2001, the FDA announced that it was rejecting ImClone's new cancer drug, Erbitux. The drug represented a ... Read Full Answer >>
Hot Definitions
  1. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  2. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  3. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  4. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  5. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center