While I am not predicting a dive in the US market next year ' in fact I'm mildly bullish for 2003 ...
While I am not predicting a dive in the US market next year ' in fact I'm mildly bullish for 2003 ' there is plenty to be nervous about. So here are the 10 scenarios that scare me most, in reverse order.
Number 10 is a Saddam stalemate. George Bush, after rattling the US sabre, has retreated a bit from his hawkish rhetoric and seems to be waiting for the United Nations to take the lead in crusading against the Iraqi dictator.
What if we have neither war nor peace? What if the UN threatens action and Saddam Hussein just smiles? What if Bush then tries to assemble a coalition to bypass the UN and fails? The stock market doesn't take well to gnawing uncertainty.
Nine is Saddam strikes. Worse than a stalemate would be a war that seems unwinable. When the US and its allies fought Iraq nearly 12 years ago, there was quick success. There is no guarantee that will happen again.
Eight is terrorism. The 11 September attacks on the World Trade Centre and the Pentagon were the first major incursions onto US soil by a foreign entity in close to two centuries. Another terrorist strike might have less shock value. The public's sense of vulnerability, however, would probably be greater.
Seven is doped accountants. Executives at Enron, WorldCom and other high-fliers of the last bull market painted falsely bright pictures of their companies' financial health. Accountants, who were supposed to guard against such shenanigans, were asleep at the switch, if not outright collaborators.
Six is if the profit pall persists. By this point in the bear market, many investors expect corporate profits to begin rising ' but it is not happening yet.
Five is the double dip. Some economists think the US, barely out of one recession, will immediately succumb to another. The dreaded double dip could happen if unemployment grows and scared consumers cut back spending.
Four is that rates rise. Falling interest rates are like gentle spring rain for stock prices; rising rates are icy poison. The Fed might do an about-face next year if the dollar weakens badly or hints of inflation emerge, however. With rates so low, some people feel they have nowhere to go but up.
Three is that panic presides. The market slide from January to August this year reflected disgust with corporate ethics, accounting scandals and terrorism. The September decline, on the other hand, was an old-fashioned panic. Stocks fell because investors were scared the fall would not stop. There is nothing like a selling bandwagon to prolong the market's agony.
If such a spiral reignites, we could have a market crash like 1987.
Two is that deflation devastates. Optimists argue that low inflation is a big plus for the market. Pessimists say the game has changed, and that we are in for years of falling prices and wages, or deflation. It happened in the 1930s.
One is vulnerable valuations. This is the big one because despite the long market plunge, share prices are still high by several yardsticks.
Less aggressive stance towards Iraq.
Easing strategy of Federal Reserve.
Low inflation is prevailing.
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