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5 Reasons the Stock Market is Vulnerable

Written By: Comstock Partner  |  Posted: Tuesday, December 7th, 2010

In our view the market, at current levels, is highly vulnerable to a major downturn as a result of negative fundamentals and high valuations. Following is a summary of important factors likely to impact stocks in the period ahead.

The economic fundamentals remain weak. Following the deepest recession since the 1930s the recovery has been extremely slow and too heavily dependent on an inventory turnaround and government transfer payments. The usual catalysts for self-sustaining growth have largely been absent, including consumer spending, employment, housing and credit availability. As we would expect after a major credit crisis, debt deleveraging has offset most of the massive fiscal and monetary stimulus undertaken by the Administration, Congress and the Fed. Growth has been slogging along at an annual rate of 2 percent or under and threatens to go even lower as stimulus efforts wind down. In addition the dire financial condition of numerous state and local governments is already leading to sharply reduced spending (see Cisco for example) and the possibility of state defaults. The economy is between a rock and a hard place as further stimulus would threaten to send the budget deficit out of control while austerity would send the economy careening lower.

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