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Investors are feeling a little apprehensive right about now. No matter which yardstick they use, from the Dow Jones Industrial Average to the Wilshire 5000 total market index, the market is down year-to-date.
After the double-digit increases of 2003 many people poured money back into the stock market, afraid to miss the rally. While history points to the fourth year of an incumbency that underperforms the third, conventional wisdom called for a stable to strong 2004 stock market. And while it may be premature to call the rally over -- we still have more than half a year left for trading -- the fact is that the market is underwater and facing some serious headwinds.
The first obstacle is Wall Street itself. It is prone to climbing a wall of worry. Good news on Main Street is seen as bad news for Wall Street. Just look at the economy.
It appears to finally be in gear after some fits and starts along the way: The labor picture is decidedly brighter, with approximately 500,000 jobs created in March and April; corporate profits have been in recovery mode for at least a year; and the housing and auto markets, two of the main engines that drive this economy, show no signs of cooling down.
But with a strengthening economy comes rising interest rates, and the Federal Reserve has signaled that sooner, rather than later, rates will have to rise. Instead of focusing on the glass half full (a growing economy), Wall Street sees the glass as half empty (fearing rising rates). Of course, that view overlooks the fact that short-term interest rates are at a 46-year nadir, and would still be historically low even if the normally deliberate Fed hiked rates in a 0.5 percent increment.
Even with the accompanying threat of higher interest rates, a strong economy may not always be good for the dollar, especially if inflationary pressures loom. The dollar plunged on Wednesday, reversing a 5-month winning streak, on news of a record $46 billion trade deficit in March. Meanwhile, crude oil has reached $40 per barrel, the highest it's been in 13 years. Oil demand, not just from here but around the world, is expected to rise the most in 16 years as global economic growth accelerates, and rising crude oil prices also means less spending money for consumers, hence a drag on the economy.
And as always, investors hate uncertainty. Recent developments in Iraq have made that situation increasingly unstable. How much this war in Iraq and the fight against terrorism will cost us in dollar terms and human terms is still up in the air. How long we will need to divert resources is another unknown.
What we do know is that this investing environment will change. There will be opportunities to buy the dips with a lesser degree of risk. But what should you do with your money in the mean time? Tune in this Friday when we discuss just that with Steven Romick, manager of the FPA Crescent Portfolio and Wall $treet Week with FORTUNE contributor Michael Farr.
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