What's the outlook for the stock market

What's the outlook for the stock market

The US stock market is in for a ride in 2019 as the world's largest economy faces a host of difficult issues, including a prolonged government shutdown, a crucial Sino-US trade truce and the prospect of a recession validated by a flattening yield curve and a relentless approach from the FED on rate hikes.

To better grasp the eventual reversal of the bull market, an understanding of what triggered the downturn of US equities is required. The Fed's decision to increase interest rates served as a means to subdue an overheating economy in the US; however, it also poses a great threat to corporate profits alongside rising borrowing costs. Moreover, a higher interest rates' policy is dampening investors' appetite for stocks and is now leading them to bond investments. This would ultimately lead to lower long-term yields, influenced by the negative expectations surrounding the economy. This could potentially invert the yield curve, a signal for a looming recession.

Once we combine the risks of higher borrowing costs on businesses and consumer spending with the economic problems engendered by the US-China trade war, a bear market in US equities isn't a far-fetched possibility. The trade dispute instigated by President Trump was an attempt to punish China for some of its trade policies, with potentially little consideration for the inverse effect it would have on the domestic economy. Not only has it caused problems pertaining to trade balance, it leaves US technology firms - the leading drivers of the stock market - subject to higher costs and a disrupted supply chain as China intends to retaliate.

The fourth quarter earnings season resulted in some better than expected corporate earnings reports, however sentiment is due to change as the effects of the US government shutdown and the unresolved trade war have yet to come into full effect. With so much uncertainty lurking domestically and abroad, it won't take much to set off a bear market in the US equities.

This was written by the ADSS Research team.