Risks to Equity Markets in 2012

By Heidi Green , last updated December 30, 2011

The world has certainly seen a tumultuous year when it comes to the stock market. With economic doomsday prophecies competing for headline space with tidings of full-on recovery, even grizzled Wall Street veterans have been left in a bemused daze, their shoulders arched upward in a perpetual shrug. One minute, Bull Markets are on the rise, and proclamations of the merciful end of the recession can be heard through the narrow corridors of the Financial District. The next minute brings shrieks of horror, as a failed finance summit somewhere in the European Union creates a collective exchange floor freak-out in markets from Hong Kong to Beirut. Pictures of tired, frustrated traders with their faces in their hands abound. What will 2012 portend for the equity markets? More of the same, or a return to stability?

With the combined specters of European financial instability and a flaccid U.S. housing market floating over everyone's heads, the initial 2012 outlook looks patently dark. But on closer inspection, there are certain beams of hope flickering through the murk. But in order for any of those beams of hope to grow stronger, market risks must be acknowledged and dealt with. The first risk, and probably the most pressing, is the unemployment rate. Currently hovering around eight to nine percent, the unemployment rate will have to drop to less serious levels if the equity markets are to see improvement in 2012.
The Housing Market and Foreclosure Rate
It seems that the housing market has been having a particularly tough time over the previous couple of years. And with no end in sight to the housing slump that began a few years ago, the repercussions for the economy at large and the equity markets in particular, do not look too good. And because the housing and real estate market is so closely tied into the employment situation, there needs to be a double spurt of growth in order for positive changes to occur. After all, people don't buy houses or invest in real estate when their money is tight. And they especially don't when they have no job at all.
Tech Companies Must Impress Investors
The biggest companies to start trading on the markets in 2011 were nearly all tech companies. Unfortunately, all of the biggest disappointments in the markets were these same tech companies. In order for 2012 to be a bullish and banner year for equity markets, the dozens of tech companies primed to drop their IPOs into the turbulent markets must make sure that they stay golden. Companies like Groupon; whose conceit centers around providing deep discounts to consumers that frequent local merchants, should be prepared to leverage longer term strategies for profitability. Companies like Demand Media (which provides online content in order to garner unique page views and "click-throughs") might need to rethink their entire business model altogether. With search engines such as Google and Bing using improved algorithms to winnow out the type of slapdash, generic "articles" that Demand is notorious for producing, an emphasis on quality content must be made.
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