There are two looming risks that could stop the stock rally that began in March 2009 dead in its tracks. As if the world had learned nothing from the credit crisis, both of these risks are rooted in excessive debt. Which one will percolate first?
The U.S.: Public debt
Last week, rating agency Moody's
China: Bank debt
Fitch, a rating agency, downgraded two mid-sized Chinese banks last week, saying it "views 'bubble risk' as greatest for Chinese banks." What is the relationship between Chinese banks and U.S. stocks, you might legitimately ask? It's partly a matter of sentiment: Investors now perceive China as a juggernaut that even a global crisis couldn't hold back, bolstering its influence on markets. In January, for example, when China announced it was tightening credit growth, world stock markets pricked up their ears.
Unfortunately, one of the ways in which China fended off a slowdown was with a flood of bank lending. Just as JPMorgan Chase
Underweight the broad U.S. market
Both of these trends will probably take some time to play out. However, with U.S. stocks trading at an above-average earnings multiple, all that is required for a market correction is a change in investor sentiment on either front. The timing of such a shift is impossible to predict -- and these are just two of the risks that could precipitate one -- but I think it is fairly likely to occur this year. Now isn't the time to carry a full position in U.S. stocks through index funds such as the SPDR S&P 500 ETF
Investors shouldn't expect any significant gains from U.S. stocks this year -- Global Gains co-advisor Tim Hanson explains why you need to own some of the top markets right now.
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You can follow Fool contributor Alex Dumortier on Twitter; he has no beneficial interest in any of the companies mentioned in this article. Moody's is an Inside Value and a Stock Advisor selection. Motley Fool Options has recommended a write puts position on Moody's. The Fool owns shares of SPDRs. Try any of our Foolish newsletters today, free for 30 days. Motley Fool has a disclosure policy.