3 Problems In Store For The Equity Markets In 2012

By Billy Fisher | December 26, 2011 AAA

The equity markets have notched a strong recovery in the closing weeks of 2011. The SPDR S&P 500 ETF (ARCA:SPY) has surged around 5% since Thanksgiving. The rally has left the S&P 500 near the positive territory for the year, and the momentum may continue on into the New Year, but there will be some significant headwinds that equity markets will have to contend with. Here are three indications that stormy waters may lie ahead. (For more information on the SPY ETF, read Exchange-Traded Funds: SPDR S&P 500 ETF.)

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Cracks in the Foundation
On Tuesday, the S&P/Case-Shiller index showed that home prices slid 3.4% from October 2010 to October 2011. The index, which tracks property values in 20 different U.S. cities, is feeling the weight of a steady stream of foreclosures. This trend seems to indicate that it could be some time before the troubles of the housing market are completely flushed out.

On a positive note, the National Association of Home Builders/Wells Fargo housing market index increased from 19 in November to 21 in December. The upward move indicates that homebuilder confidence is improving, but it is still nowhere near where it was a few years ago. Homebuilding stocks such as Toll Brothers (NYSE:TOL), D.R. Horton (NYSE:DHI) and Lennar Corporation (NYSE:LEN) are in the middle of a torrid three-month recovery in their stock prices, setting up their shareholders nicely for 2012. (For related reading, see Economic Indicators: Housing Starts.)

Running on Fumes
Oil prices rose to a two-week high on Tuesday, due in part to rising confidence among U.S. consumers as to the state of the economy. The increase in crude prices has lifted the United States Oil Fund (ARCA:USO) about 23% since October 1. While the move by oil is generally a positive indicator for the health of the economy, the surge may be running out of steam.

The research firm EPFR Global said that investors pulled $490 million from commodity funds for the week ending Dec. 21. Bloomberg has also reported that recent data from the Commodity Futures Trading Commission shows that hedge funds have cut their bets on higher commodity prices to a level not seen since 2009, when many commodity prices were in the process of bottoming out. (To learn more, read What Determines Oil Prices?)

Health of the Consumer
The health of consumer spending has been on the mend, but there are some signs that the pace of the recovery will not be as rapid as one may have hoped. The National Retail Federation has said that holiday sales will rise 3.8% on a year-over-year basis. Last year, holiday sales were up 5.2% over the previous year.

The Commerce Department said that personal spending rose by 0.1% last month, but the slight uptick was less than the median 0.3% prediction of economists surveyed by Bloomberg News. The improvements in holiday sales and personal spending are definitely positive signs, but the rate of improvement seems to indicate that consumers are still a bit timid. (For related reading, see Consumer Spending As A Market Indicator.)

The Bottom Line
The global equity markets have been running on all cylinders, but they will have some notable barriers standing in the way during the months ahead. Slumping home prices, uncertainty in the commodity markets and hesitant consumer spending are just a few factors that will need to be addressed. These challenges can be overcome, but I think the early stages of 2012 will be anything but smooth sailing.

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At the time of writing, Billy Fisher did not own shares in any of the companies mentioned in this article.

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