We're less than a week away from a key milestone. The first half of 2011 will come to a close and investors will look ahead for what the second half of the year has in store.
One thing's for sure: the past will not be prologue. More than likely, the market is going to finally respond to some of the looming crises and turn down ["5 Economic Crises that Could Derail Your Portfolio"]. Or these issues may recede in importance, kicking off the next leg of a powerful bull market that began in March 2009 and lasted for more than two years. ["5 Reasons to be Optimistic about the Stock Market"]
Another boring 3% gain for the back half of the year seems to be the least likely scenario. Here are five potential wildcards that could affect the market before the glittering ball again drops in New York's Times Square. (As with any bold predictions, take them with a large grain of salt.)
#1: The China streak ends.
It's been a remarkable two decades for China. The country's economy has grown at least 7.6% every year since 1991.
Yet it's increasingly clear the country's policy makers are playing a very tricky hand, looking to slowly let its currency strengthen, cool down trade tensions and maintain employment levels that will avoid serious social unrest. [See: "5 Landmines for Chinese Stocks"]
It may be inflation or a fast-weakening bank sector that finally forces the Chinese economy into a sudden slowdown that spooks global stock markets. A massive amount of loans were doled out in recent years to encourage housing construction, high-speed rail and other infrastructure investments. If high prices cause a significant slowdown in any major sector, then watch out...
Prediction: Later this year, Chinese banks finally acknowledge very weak loan portfolios, leading to major asset write-downs and a liquidity crisis. Investors around the globe come to fear that a weaker Chinese economy will pressure other economies.
#2: A major technology/content
As the Apple (Nasdaq: AAPL) juggernaut continues, a wide range of consumer-focused hardware and media firms come to fear that the company's rising scale will create perpetual cost advantages, leaving Apple's competitors to fight over the scraps. This fear forces Sony (NYSE: SNE), Nokia (NYSE: NOK), Hewlett-Packard (NYSE: HPQ) Research in Motion (Nasdaq: RIMM), Microsoft (Nasdaq: MSFT) and others to seriously consider a merger or acquisition.
Prediction: A major deal happens -- which investors will greet with enthusiasm at first, as hopes rise of catching "the next Apple" are cited -- but the hoped-for synergies will fail to materialize.
#3: The cash migration
As part of a broader tax agreement, the Obama administration will relent and allow major corporations to repatriate cash from overseas at a 10% tax rate (twice the rate a similar amnesty offered in the last presidential administration). The large influx of cash back to the United States strengthens the dollar and kicks off an even deeper wave of stock buybacks. [See: "These 3 Companies are Buying Back BILLIONS of their Own Stock"]
Prediction: The buybacks and deal-making help the market start to rally late in the year, which will set the stage for stock market gains of 10% to 15% in 2012 as well.
#4: Defense loses big
Defense stocks such as Lockheed Martin (NYSE: LMT) and Northrup Grumman (NYSE: NOC), which continue to trade near 52-week highs, will be among the biggest losers in the S&P 500 in the second half of the year, as incoming Defense Secretary Leon Panetta lays out spending cuts far deeper that many expect.
Prediction: The moves will have a degree of bipartisan support from deficit hawks on the right and foreign policy doves on the left who would rather see defense get cut over other social programs. The defense industry begins a period of cyclical downturn, which ends up being deeper and lasting longer than many had originally thought.
#5: Tourists flock to the United States
Efforts to streamline the cumbersome tourist visa process initiates a major uptick in visits and spending by foreigners later this year, boosting leisure stocks such as Disney (NYSE: DIS), lodging stocks such as Marriott International (NYSE: MAR) and globally-exposed air carriers such as United Continental (NYSE: UAL). Hotel room prices in popular tourist destinations such as New York City climb to new heights.
Prediction: The trend continues into 2012, making tourism (along with agriculture) a key driver behind a gradually shrinking trade deficit and a particularly bright spot in the stock market.
Action to Take --> These five events are worth monitoring in the coming months. They'll either help move the market up onto a higher plane or blunt some of the gains posted in the past two years. Be ready to jump on investing plays that will either help you or protect your assets when these events begin to take shape.
More than likely, it will be the "surprises" we don't see coming that will have a meaningful impact on the market. Put on your seat belts: the ride may get bumpy.