Individual investors who sold and fled the stock market are starting to buy stocks again as stock prices have risen significantly off their lows in March 2009. According to contrarian philosophy, the return of panic sellers to the market is a sign of a market top and an imminent correction. If so, retail investors will get whipsawed again and again as they continue to sell low and buy high. Whether or not that turns out to be true, there are warning signs ahead.
There are signs that housing prices are rising, and if that picks up, it would stimulate economic growth as firms like home-improvement retailers do well (“Are Mom and Pop Heading for Wall Street?,” Wall Street Journal). But problems in Europe (for example, Germany’s contraction or recession) remain forces that could negatively impact the U.S. economy and stock market. As the Euro falls relative to the U.S. dollar, U.S. goods become more expensive and less competitive, hurting U.S. economic growth.
In addition, political paralysis at home could have ugly consequences for the U.S. stock market. If Congress cannot come to an agreement on how to avoid them, draconian automatic spending cuts could result in an economic contraction in the U.S., leading to a decline in stock prices, according to the article.
As always, investors and their advisers should proceed with prudence and caution in making investment decisions in these troubling and uncertain times.
Page Perry is an Atlanta-based law firm with over 150 years of collective experience maintaining integrity in the investment markets and protecting investor rights.