As we close out a topsy-turvy decade that has seen more blown bubbles than a raging preschool party, it's a good time to remind ourselves of the dangers that still loom. So I asked three of our analysts:
What's the biggest investing danger in 2010?
Morgan Housel: I'd say it's getting too cozy with the current interest-rate environment. Right now, laughably low interest rates are supporting just about everything. Stocks, housing, banks. Stimulus packages. Treasuries. Seeds of a job recovery ... you name it, it's riding low interest rates. That won't last forever.
If you invest in banks like Goldman Sachs (NYSE: GS ) or JPMorgan Chase (NYSE: JPM ) , you have to look at their current earnings and ask yourself what happens when interest rates inch up even slightly. My guess is it won't be pretty. Both are largely reliant on fixed-income trading, which could get clobbered, at least relative to today, when even a glimpse of interest-rate normality returns.
Some will say, "Well, OK, but the Fed has promised it'll keep rates low indefinitely." That's true, but there are caveats. One, the Federal Reserve will stop buying mortgage-backed securities this coming March. That's almost certain to lift mortgage rates, which hurts housing prices. Second, weak Treasury demand from foreign purchasers could wallop government bond prices, which not only squeezes long-term borrowing rates for businesses looking to expand, but could undermine the financing of stimulus measures that are fueling GDP growth.
I don't think any of these are end-of-the-world problems to fear, but investors who assume that today's interest-rate environment is anything close to sustainable are absolutely, 100%, guaranteed to be disappointed.
Alex Dumortier, CFA: There is certainly no shortage of significant dangers lurking at the moment, but I'll pick one that is topical: a sovereign debt crisis -- S&P downgraded Greece one notch to triple-B-plus last week. Last month, Dubai World, a Dubai-controlled company, requested a standstill agreement from its bondholders, and that roiled the global markets. If the debt crisis of a city-state with the economic heft of Arkansas can upset equity markets, imagine the impact of a fully blown crisis in a Eurozone nation.
In the case of Greece, that process is under way, and, much like the UAE in Dubai's case, the European Union has no formal guidelines for addressing the situation, which creates tremendous uncertainty for investors. Is this a true danger for U.S. stock investors? Armed with a long-term value orientation, one can safely ignore the potential ripple effect on stock prices -- or better yet, seek to profit from it -- but it could be a landmine for weaker hands, including leveraged or momentum investors. Similarly, speculators caught holding weak financials such as Fannie Mae (NYSE: FNM ) or AIG (NYSE: AIG ) could pay a heavy price.
Matt Koppenheffer: In a word, complacency.
From late 2007 to early 2009, investors found themselves face-to-face with one of the most severe stock market crashes that the U.S. has ever seen. Even seemingly high-quality companies like General Electric (NYSE: GE ) and Starbucks (Nasdaq: SBUX ) saw their stocks chopped by more than half. Banks and financial companies got hammered even harder, and we saw once-venerable firms like Lehman Brothers snuffed out of existence entirely.
Then, between early March and today, the market has charged back, and many of the worst-hit stocks like Citigroup (NYSE: C ) and AIG have become multibaggers from their low point.
But now where do we stand? The market seems to have been cleansed of extreme fear, but the greed that helped drive 2009's big gains has been waning as well. But that's hardly an excuse for investors to fall asleep. As Alex Dumortier pointed out, the recession may not be over, and even if it's declared "officially" over, there are potential sinkholes still lingering around out there. And even though Fed chief Ben Bernanke may have tried to dispel worries about a stock market bubble, current valuations make me more than a bit wary.
While over-vigilance can do as much damage to your portfolio as neglect, investors will be well served in 2010 by making sure that their portfolio is chock-full of high-quality companies that are still trading at reasonable prices.
Those are our biggest danger warnings...what are yours? Join the discussion in the comments area below.