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3 Threats the Market Has Ignored

By Mike Klesta – Apr 12, 2013 at 5:16PM

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Will the market react to these catalysts?

The stock market has been on a tear this year, with the Dow Jones Industrial Average (^DJI 0.10%) and S&P 500 (^GSPC -0.12%) breaking record high after record high. Market bears have been cowed on a weekly basis, as they've started to sound like wild-eyed soothsayers waving "The World Will End Soon" signs on street corners.

But it wouldn't take all that much for the market to take a big step backward. Earnings season may be upon us, but one big event or drawn-out process could be enough to cause a market correction. Here are three possible catalysts over the next six months:

1. Congress
While the debt-ceiling debate has largely faded away, Congress will be discussing its annual budget this summer. The budget discussion will likely overlap with the expiration of the current debt ceiling deal passed earlier this year. Congress voted to stop enforcement of the federal debt limit in January, and the agreement expires in May. The Treasury will then be forced to take "extraordinary measures" to keep spending below the ceiling, which would likely not be breached until August.

While it's unlikely Congress will breach the debt ceiling, some legislators have been willing to push the envelope in the past. It wouldn't be shocking if a congressional game of chicken gooses markets a bit later this year.

2. Federal Reserve
The Fed has been buying billions of dollars of bonds since 2008, in three iterations of the controversial "quantitative easing" program. Though the increased cash supply hasn't led to inflation as some feared, it has given the stock market a boost. Recent meeting minutes have shown growing concern among Federal Reserve board members over the program, with some hinting that the program could start winding down come summer.

The Fed will likely give ample notice when it finally does start mothballing the program, leaving investors and financial institutions alike a chance to prepare for its end. But no matter how much notice is given, the end of quantitative easing will have an affect on the stock market, and it likely won't be a positive one.

3. North Korea
The notorious nation is known for bluster and saber-rattling, but tensions are particularly high on the Korean Peninsula. With improved nuclear capability, and a young, untested leader, North Korea is a risk. But an all-out war is not in the country's best interest. North Korea is known for pushing its enemies' buttons to acquire concessions. The country has faced years of sanctions, and its economy is in shambles. Its only real source of leverage is the threat of nuclear war, and it uses that threat in an effort to relieve the pressure.

Should investors worry? Not really. The markets have largely shrugged off the heated rhetoric. While any form of military action on the Korean Peninsula would likely affect the markets, the chance of that happening is fairly small.

Mike Klesta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$34,429.88 (0.10%) $34.87
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$4,071.70 (-0.12%) $-4.87

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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