CNNMoney’s La Monica: Stocks Shouldn’t Be So High Without Imminent Recovery

Thursday, 20 Sep 2012 07:52 AM

By Michael Kling

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When it comes to predicting the outlook for stocks, you can quote Doris Day and Judy Holliday. Cry if you want to, the party's over for stocks.

At least that's the viewpoint of Paul La Monica, assistant managing editor for CNNMoney.

The Federal Reserve and European Central Bank have provided the spiked punch bowl that's prompted the recent stock market boost. But they can't keep the juice flowing much longer, warns La Monica. Take a step back and look at the ongoing challenges facing stocks and you wonder how they've done so well this year.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

"Absent accommodative monetary policy, there is no reason to expect the market to be doing this well this year ... especially during the past few weeks," John Norris of Oakworth Capital Bank in Birmingham, Ala. told CNNMoney.

La Monica ticks off lists of risks. Growing tensions in the Middle East might lead to violence and prompt oil prices to spike. The drop in the dollar — a side effect of quantitative easing — might drive up the prices of oil and other commodities. China's economy is slowing, and Europe continues to face problems.

"And if all that weren't enough, investors should be concerned that partisan politics could trump common sense and plunge the U.S. economy off of the dreaded fiscal cliff of budget cuts and higher taxes," he warns.

Despite challenges, the broader market is almost back to its 2007 highs and tech stocks are higher than they've been in a dozen, he says, adding that he doubts many stocks should be so high without an imminent global recovery.

Earnings of companies in the Standard & Poor’s 500 Index are expected to drop by 2.6 percent in the third quarter from the previous year, La Monica notes, citing FactSet Research.

Analysts are predicting that earnings will rise 10 percent in the fourth quarter from fourth quarter 2011 and 11 percent next over 2012. Yet, analysts often offer rosy predictions, he warns.

Many market professionals feel stocks are due for a retreat, according to The Associated Press. Wall Street feels there's nothing more the Fed can do, and investors will be focusing more on weak economic growth.

"The market is at high levels, certainly due for a pullback, and I suspect we’ll probably see one,” said Peter Cardillo, an economist at Rockwell Global Capital.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

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