The Biggest Threats to the Stock Market's Growth: Watch out for These Signals

With the stock market rallying about 70% from last year’s low, investors, traders and economists are now thinking (and betting) that the economy is ready to bounce back and that America will see a great expansion in the coming months. On the other hand, there are many critics who point to the weak jobs environment and dwindling consumer confidence as reasons why a rebound will not last. While both sides make valuable points, only one can be right; here are the biggest events and indicators you should look for when deciding where to put your money:

1.) Progress after government intervention has faded – The Fed has been buying over a trillion dollars worth of Mortgage Backed Securities (MBS) and Treasuries over the last several months. They are scheduled and reaffirmed their intention to discontinue the program after March. Be sure to keep an eye on how mortgage rates move as a result. Ditto for the many other programs ending in the coming weeks and months (TALF, homebuyer tax credit, etc.).
2.) Unemployment and consumer confidence – These two indicators tend to go hand in hand. That is, when unemployment is high, consumer confidence usually will be low; the reverse is true as well. Given that almost 70% of the American economy is made up of consumer spending it would be wise to watch these indicators; any meaningful improvement will likely mean a healthier, growing economy. (Be sure to look at the number of jobs lost or gained monthly, as well as the unemployment number, since sometimes the headline number improves while the jobs are lost).
3.) The housing market – This market is tricky to gauge and the government stimulus via the homebuyer tax credit has fogged the picture a bit. However, the homebuyer credit will be ending, essentially by the end of April, and the Fed’s decision to discontinue the MBS purchases will most likely raise mortgage rates. Can the housing market avoid diminishing demand and falling prices? It’s an important question and certainly a large puzzle piece to the economy.
4.) Interest rates, inflation and volatile commodities – While the Fed has pledged to keep rates low “for an extended period”, economists are beginning to think that rates will be higher 6-9 months from now. Since rate increases are usually as result of a higher inflation, and in turn higher commodity prices (think oil, gas and food), it will have an effect on consumer spending and confidence. Remember, moderate rate increases are OK, as they indicate the economy is improving; however, a large rate increase over a short time period is a bad sign. Also, higher rates will likely increase yield on savings and CD products, and decrease prices of bonds, so this certainly one category to watch for.

Only time will tell how these indicators play out, and while there will always be participants in the market who have differing views, pay attention to the indicators above and filter out the noise; it will help you make an informed decision about where to put your money. If you see that interest rates and inflation are going higher and would like to keep your money safe, a high yield money market or savings account may be for you; however, if unemployment decreases while there is a rise in consumer confidence and the housing market, it may be sign of the economy improving further, so the stock market may be right for you. In the end the decision rests on your shoulders, just remember, whichever route you choose, sites like BestCashCow.com have tools to find the best savings accounts and the lowest cost brokerage accounts, so at least you’ll be spending less time finding a custodian for your money and more time analyzing this complicated economic environment.