We’re now more than halfway through 2013, and it’s been a winning year so far for stock investors. The same can’t be said for gold bugs, Paula Deen, and the Los Angeles Lakers.
However, there are plenty of things that can spoil the fun for market watchers. Let’s look at five things that can go wrong during the second half of this year.
1. Housing prices can start to head lower
Are we in another residential real estate bubble? The Federal Housing Finance Agency reported earlier this week that home prices rose yet again in May, climbing more than 7% over the past year. The findings are in line with the metropolitan market-oriented S&P/Case-Shiller data that shows a strong spike in what folks are willing to pay for homes over the past year.
However, interest rates have been on a tear since May. That same 30-year mortgage that would’ve set you back only about 3.5% in interest — and as low as 3.31% late last year — has ballooned up to 4.3%, according to loan tracker Bankrate.com.
Rising real estate prices encourage builders to ramp up production. Higher mortgage rates limit our power to pay for them. The National Association of Realtors is showing an 18% decline in housing affordability since January.
Many economists argue that rising rates will slow the ascent of real estate prices instead of crash the market again, but who will be moving into these more expensive homes with higher monthly mortgage payments later this year?
2. Stock prices can head lower
Stocks have been rallying for most of the past four years. The S&P 500 is up roughly 150% since bottoming out in March 2009.
The only problem is that earnings haven’t grown at the same pace. Cost-cutting may have helped prop up bottom lines a couple of years ago, but the slow pace of this economic recovery is reflected in the many bellwethers for which growth has pretty much stalled.
The S&P 500 is now fetching 18.4 times trailing earnings. That multiple was at 15.6 a year ago, and as low as the pre-teens before that.
Things are even uglier in the tech space, where the Nasdaq 100 has seen its trailing earnings multiple explode from 11.4 last year to 18.5 now. Dramatic stock price appreciation and tech bellwethers that are feeling the pinch of contracting margins have turned a value hunter’s playground into a minefield.
There are plenty of stocks trading at attractive valuations relative to their growth prospects, but they’re getting harder to find.