5 Macro Risks Keeping Stocks Down

Markets by their very nature are risky, but sometimes the macro risks are bigger and more dangerous than the bulls can handle. As we kickoff 2015, I see five big macro headwinds facing stocks—headwinds that are likely to limit upside at least in the near term.

In order of near-term importance, they are: 1) What will ECB QE look like? 2) Can oil stabilize? 3) Will we have another “Grexit” scare? 4) Is there really a global deflation threat or is it just oil? and 5) When will the Fed start to tighten and how will markets react?

Of the five, the first four are almost equal in importance with regards to what stocks do over the coming weeks. And, it’s important to note that European QE concerns now have trumped (or equaled) oil contagion worries as the near-term leading indicator for stocks. This was made evident Friday when articles in Bloomberg and Reuters were largely responsible for the drop in stocks (it wasn’t the jobs report).

Keep an eye on the WisdomTree Europe Hedged Equity ETF (HEDJ), a proxy for European stocks, as this fund’s direction will betray how the market assesses those concerns.

It’s key to realize, though, that beyond the very short term, none of the above should be materially negative influences on stocks.

The ECB may disappoint with initial QE, but the bottom line is the ECB knows it has to expand its balance sheet and provide more stimulus, which is bullish for European stocks over the coming months and quarters.

While we haven’t likely seen the low tick yet, oil appears to be trying to stabilize, as prices at these low levels will likely start to have an impact on marginal producers (so the pace of declines should slow), which is what is important from an “oil contagion” standpoint. The global “deflation” scare is mostly linked to oil prices so when they stabilize, so will inflation statistics. Third, the “Grexit” story is likely overdone (the chances of Greece leaving the EU remain very slim, and we know that from the bond markets).

Finally, the concern about the FOMC raising interest rates is a problem for the April time frame (as we approach the potential June “lift off” in the cost of capital).

The point here is that we are likely to see more near-term volatility until the events above get resolved, but I would view any material dip below 2000 in the S&P 500 as a buying opportunity in domestic cyclicals (banks, retailers and tech specifically) and continue to view European market weakness as offering fantastic longer term entry points.

Bottom line: The near term may be bumpy, but we see no reason to materially alter equity allocations.