After a tumultuous half-decade, the world has gone relatively quiet.
Sure, the Chinese economy is slowing, the Federal Reserve is preparing for an end to quantitative easing, and the U.S. government is weighing down the economy with its sequester-driven setbacks. But we haven't seen any catalyzing events, positive or negative, of the sort that can trigger a rapid 1,000-point gain or loss in the Dow Jones industrial average.
Whether it's a tsunami in Japan or a sudden plunge in Europe, market-moving events aren't always foreseeable. These kinds of events caught the markets by surprise, and more surprises probably lie ahead. For example, of the four potential "black swans" I described at the start of this year, one has already come to pass.
Yet we can still identify other events that have a decent chance of playing out, with profits or losses to follow close behind. Here are five themes I'm monitoring closely in this year's second half.
|1. U.S. natural gas exports get the green light|
|In recent years, companies have laid out plans to build huge natural gas export terminals along the Gulf Coast. The move is quite logical: Our gas costs just a fraction of what it costs in Europe and Asia, and the profit gains in terms of exports would be enormous. |
But many of those plans remain in limbo, as the Obama administration has not yet delivered a clear directive on the issue. Consumers of natural gas such as electric utilities and chemical companies hate the idea of exports as they may raise the price of natural gas. Energy producers absolutely love the idea, for obvious reasons.
The Obama administration is aware of the heated nature around this debate, and chose to side-step this issue when it recently drafted this set of energy proposals.
Yet the administration is expected to make a decision on the matter in coming months, and a thumbs-up for exports would likely lead to a quick share price boost across the industry.
|2. Stimulus in China|
|The Chinese government has largely stayed on the sidelines during a recent banking cash crunch, suggesting that the era of government intervention has passed. That's a fine stance to take as long as the Chinese economy experiences only a mild slowdown. But if the Chinese economy starts to decelerate quickly, inaction will no longer be a choice, and the government will likely pump funds into the economy. And that would likely give a sharp boost to commodity prices, many of which have been in freefall lately. As I've noted before, this is a good time to track the supply and demand dynamics that are impacting commodities, because supply cuts will eventually set the stage for the next bull market in commodities.|
|3. Europe's pent-up demand finally kicks in|
|One of the unreported aspects of Europe's malaise is the sharp underinvestment in many industries, as factories get older, vehicles rack up the miles, and information technology systems start to slip behind the global standards. At some point, perhaps later this year, we will see the start of a catch-up cycle in capital spending. It did wonders for our economy in 2010 and 2011, and it could be a very positive catalyst for European economies. |
Finding the right entry point for European stocks is tricky. European stocks seemed to have gotten ahead of themselves in the final six months of 2012, when the Vanguard European ETF (VGK) rose 17% (compared with a 6% gain for the S&P 500). Yet in the past six months, the tables have turned, and the S&P 500's 14% gain handily exceeds European break-even results. (I'm still partial to emerging markets, which have sold off sharply this year, yet are showing signs of a bottom lately.)
|4. Japan's experiment ends badly|
|A country that already has the highest debt levels in the world (at 230% of GDP) has embarked on more government borrowings to stimulate the economy. The experiment, which is aimed at triggering a bit of inflation and consumer demand, absolutely needs to show signs of progress in coming months. Global bond markets will become increasingly spooked if they conclude that still-higher debt levels aren't producing much of an effect. |
Japan's Nikkei index is up a stunning 50% over the past 12 months (even after a sharp recent plunge), so investors need to closely monitor the Japanese economy if they are invested in that country. The downside is fairly open-ended -- if the new Japanese fiscal policies fail to make an impact.
|5. Oil prices drop sharply, aiding consumers and select industries|
|Even as many commodities have been in a deep slump, oil prices remain firm. West Texas intermediate crude remains near $100 a barrel. However, if the Chinese economy slows, the U.S. boosts its production, and notable energy-efficiency gains are made in Europe and the U.S. (especially in automobiles), then the bias for crude will be lower -- perhaps much lower. |
I touched on these issues two months ago and though that call was premature, there's no reason to expect that such a scenario will not come to pass. Any consumer savings from falling gasoline prices could add to the consumer confidence ledger, which may be the underpinnings of a strengthening economy.
Risks to Consider: There's a good chance that the biggest event to affect the markets over the rest of 2013 is not on this list. Other global events, such as the pending hurricane season, could have a major impact as well.
Action to Take --> Some of these events will generate early warnings signs, so it pays to monitor Europe, Japan, our energy sector, and any other major factors that could affect corporate profits. The back half of 2013 may well end up being as quiet as the first half, but you shouldn't be complacent.
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