Yahoo Finance What will make our stock market head higher?
Our stock market has lost nearly 10% and some are wondering if this is a prelude to a full-blown crash.
I think the sell off is a correction but a few things have to work out to beat the crash threat.
It starts with Donald Trump and the meeting in Argentina for the G20, which is earmarked as the time when he and the Chinese President, Xi Jinping, might come to a trade deal. This is hoping the stock market would rocket higher on any news that suggested the possibility of the $500 billion tariff slap been negotiated off the table.
Deal or no deal?
And any clear revelation on what will happen going forward (USA on China tariff punishment-wise and vice versa) would create a buying opportunity for stocks.
It should also be noted that in the past two weeks there have been positive comments from the White House about a China trade deal and stocks have spiked on cue.
And you should be reminded that the third year of a US presidency is the best for stocks, though some pundits think President Trump could face the opposite and the following reasons explain why.
US getting cooler?
This week the market focused on a Goldman Sachs report that said the US economy’s hot economic growth will cool down next year – this isn’t a majority view but a growing one and it hurt the stock market this week.
Supporting this was the fact that Treasury yields or interest rates had been rising until recently. This was telling us that the bond market expected strong US economic growth, rising inflation and therefore higher interest rates.
This is why the stock market is still worried about the US central bank (the Federal Reserve), which could raise interest rates too quickly and also give too many rate rises.
Prediction for the stock market?
Some worry that slow growth and too many rate rises could dog the stock market next year! As you can see, the third year of this President has a lot to beat to conform to the past, which says we should see stocks head higher.
Will those tax cuts keep delivering?
Trump has already given tax cuts, which are often a third year play, and the first and biggest cuts will be wearing off over 2019 – that’s the view held by many but they could be underestimating the multiplier effect of the tax cut.
Clearly, for stocks to head higher and convince us that this current sell off is only a correction and not a prelude to a crash, the Fed has to hint to the market that it’s not going to be a bull in a china shop and raise rates to a predetermined agenda.
The Fed boss, Jerome Powell, has implied that he will play the game in front of him but hasn’t entirely erased fears that the Fed’s future, as well as the most recent rises, are behind this predicted economic slowdown of the US economy.
Tech stock rebound needed
A rebound in the FAANG stocks (Facebook, Apple, Amazon, Netflix and Google (Alphabet)) would help but these need a China trade deal to kick this along. I suspect the market will buy these stocks again, however, it will be with less enthusiasm.
Away from the USA, China needs to show that its current economic slowdown is going to be arrested and its Government has been cushioning economic blows with targeted tax cuts, investment incentives and efforts to get more credit to efficient private-sector companies.
This is seen as a better play than simply throwing money at the problem, which Beijing did in 2009 and 2015. That said, stronger economic news would help stocks and clearly this partly gets back to the Trump trade war implications.
Hanging out for Royal Commission recommendations
On the local front, we need to see the Hayne Royal Commission’s recommendations, which won’t come until next year, and then we’d need to know the Government’s and Labor’s proposed policy responses so we can identify when to buy or sell the banks!
I’ve said before I suspect it will be a case of ‘sell the rumour, buy the fact’, when it comes to bank shares but this is only my best guess. Both the Government and Labor will play hardball with the banks so this could remain a brake on stock prices until the election is over!
Longing to go up!
The Aussie economic outlook should be supporting a rising stock market but nearly one-third of our ASX 200 index is financial stocks and the Royal Commission is taking these businesses to the cleaners!
Throw in the revolving door of Prime Ministers, the election out there waiting to happen, controversial changes proposed by Labor for property and retirees who buy dividend-paying stocks for their income, and the tax refund that could be banned and you can see more local reasons why our stock market is struggling.
Making matters worse, Brexit and the EU’s problems with Italy and their budget give the stock market more reasons to be spooked.
All we need is a compromise!
And while all these concerns explain why we say stock markets “climb the wall of worry”, if Donald and Xi can come up with a compromise that takes away this big negative for the global economy and stocks, we’d see this correction turn into a Santa Claus rally before Christmas.
Our market will have the lead in the saddle bag of what happens after the Royal Commission but if Wall Street can rediscover its positive mojo then we will follow suit and go higher. And when we know what the Government and Labor plan to do to the banks and other finance businesses, I reckon we will see stocks spike again.
There’s old market that says “sell the rumour buy the fact” and so when we know what the banks are set to cop, the eradication of uncertainty should see bank share prices go up and this will take the overall stock market higher.
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