In the fall of 2008, the global economy headed into freefall, helping to push the stock market down to such an extent that a second Great Depression appeared quite possible.
Few would have guessed that the global economy would be on the mend a year later and that the S&P 500 would go on to double in value in just 24 months.
The odds of returning to such a gloom-and-doom scenario of 2008 are quite unlikely, but serious challenges remain. For investors, the road ahead may prove to be quite tricky.
Here are five global obstacles to closely monitor in coming months. How these issues play out will determine whether stocks rise or fall in the next year or two.
#1: Global Government Debt Woes
Investors are surely worried about Washington these days. An inability to address our staggering addiction to debt has led many to expect rough seas ahead for stocks. But you should know that similar debt problems in Europe and Japan can also derail the global economy -- and U.S. stocks. Capital markets are so intertwined these days that an economic meltdown in any of these regions would quickly spread.
#2: Unemployment Trends
The U.S. economy needs to create 200,000 jobs every month just to keep the unemployment rate steady. And hopeful signs are emerging that the private sector is starting to embark on a hiring spree.
Trouble is, state and local governments are cutting jobs, and the Federal government is expected to start doing so soon as well. These cuts will certainly blunt the gains made from the private sector.
If employment trends start to get worse again, investors will face a whole host of new concerns -- from falling consumer spending to deteriorating government finances, to even longer woes in the housing market.
The monthly jobs report, which is released on the first Friday of every month, is the single most important economic indicator for you to be tracking in the months ahead.
#3: Saudi Arabia
This Middle Eastern country is the single most important economy for U.S. investors, as it single-handedly determines oil prices with its massive output. In a worst-case scenario, social unrest in neighboring countries could spread to Saudi Arabia, threatening the country's rulers. That might push oil to $150 a barrel -- or higher -- which would quickly push the U.S. economy into recession.
#4: Hurricane Season
It's been several years since the U.S. was hit by a serious hurricane. Yet a recent spike in tornado activity, coupled with unusually warm water in the Caribbean, has led forecasters to predict that hurricanes may again wreak havoc in August and September, the peak of the season. The economic impact on either a regional economy or in the Gulf of Mexico has put a serious dent in stocks in the past, and will likely do the same in the event of a future natural disaster.
#5: The China factor
The Chinese economy is known as a massive export machine, but that country has also become a magnet for imports, benefiting everyone from U.S. farmers to European auto makers.
That's why signs that the Chinese economy may be starting to cool has many economists worried. If the Chinese economy encountered any serious hiccups, then the global economy would surely feel the impact.
The Investing Answer: Here's the good news. If these issues fail to materialize, then the stock market could rally to new heights. There are many positives in place, most notably a very healthy corporate sector and reasonable values to be had in the stock market.
A Dow Jones industrial average of 15,000 could be a real possibility in a year or two. But if these concerns do emerge into real problems, then a Dow of 10,000 is also a real possibility. By closely monitoring these five potential problem areas listed above, any sudden shifts in the Dow should come as no to surprise to your portfolio.
