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Although I’m not expecting renewed recession in the USA this year, it would be foolish to forget that the equity market is not the economy.  Complacency is an investors worst enemy.  As risk managers trying to make it to the top of the investment mountain, we have to always be on the lookout for potentially loose rocks.  Remember, it’s not the butterflies and rainbows that ruin our day.  It’s the loose rocks.  Morgan Stanley provides us with 8 risks to the equity markets in 2012:

  • As of the end of October, US unemployment was 8.6%; the broader measure of unemployment, U-6, was 15.6%.
  • Medium-term growth may be held back by: (i) continuing foreclosures, home-price weakness, and a significant inventory overhang; (ii) banks’ and households’ deleveraging and low levels of consumer confidence; (iii) state, local, and federal government fiscal austerity measures; (iv) the likelihood of Europe being or entering a recession; and (v) decelerating growth in China, India, and Brazil.
  • Global investors and officials have continuing concerns about the quality, maturity structure, and magnitude of several countries’ sovereign debt burdens.
  • Economic headwinds include financially stressed US consumers and state and local government employment layoffs and budget cutbacks.
  • Germany, France, several other Euro Zone countries, the UK and the US have been implementing fiscal austerity measures.
  • US stocks are not undervalued using long-term earnings metrics; the Shiller P/E—that is, price divided by 10-year average earnings—for the S&P 500 is 21.0, 28% above its long-term average.
  • Real median household income has fallen 10% since 2007.
  • Analysts’ consensus earnings estimates for 2012 have fallen 4% versus their peak and appear likely to decline further.

Source: Morgan Stanley

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