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.