When a few days ago, the stock market was in an oversold position, many were not sure which direction it would take. Of course, it did bounce back. Yet, now it does look doubtful whether it would gain enough strength to take an upward path. The factors that obstruct this route are:
1. Recession has struck the Euro zone.
2. Earnings growth does not look too promising in the fourth quarter.
3. New austerity measures will be likely to be implemented in the U.S. and Europe.
Although a number of corporations have increased their dividends in 2012, it does not imply that their businesses have flourished or that they have expanded; rather, many are opting for the buy-back option of their own shares. Thus there are no new plants and machineries or equipments that are being purchased by reinvestment of their capital monies. The scenario is similar to the central banks creating monetary stimulus to boost the economy of their nations. In other words, corporations are creating a false sense of security for their shareholders by artificially lowering their interest rates, borrowing money from the market through bonds and then utilizing the same in order that they can again purchase their own shares on the stock market! Is this is such a good long term strategy as it looks?
Thus the stock market; while it does look good for equities, paints a picture of interest rates that will not decline any further than what they already are at the present. Resultantly, investors will tend to shy away from the market as the risk involved at this time looks quite high indeed. In addition, as mentioned above, Europe's sovereign debt issues need to be solved through austerity measures. Similarly, the problem of annual deficit in the U.S. has to be solved; again through austerity measures. This could well imply that U.S. stands in risk of slipping back into recession.
As of now, the bouncing back of the stock market is not really quite convincing as far as equities are concerned as it was on quite a low volume. And although China could be on the path to recovery, this does not imply that one should invest in the U.S. stock market. That leaves the investor with hopes of only dividends as possible returns from the stocks that he has invested in, as he steps into next year, not really knowing how the austerity measures that will be implemented in the euro zone and the U.S. will affect the mode and nature of his future investments.
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