U.S. Stock Market Poised to Decline if Growth Doesn’t Pick Up
For the U.S. stock market, it’s all about growth. Without it, stocks could suffer their most bearish performance since the second half of 2000 (2H 2000). It was then that the S&P 500 fell by more than 10%, foreshadowing a recession beginning in March 2001. The dynamics are much the same this time around.
Then, like today, slowing growth was the main culprit in the decline. The NASDAQ lost a whopping 37.72% in 2H 2000, while the S&P 500 lost 10.03%, due to less exposure to high-flying technology stocks. But still, the slowdown in the technology sector hit S&P collective earnings hard.
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While the circumstances are different today, the bottom line remains the same. Back in 2000, slowing technology investment and everything Internet-related collapsed. It became apparent that the Internet was not going to be the earnings utopia dreamed up by big business. Today, the problem is simple generalized overvaluation, due to a torrent of central bank asset purchases and liquidity.
Although the U.S. Federal Reserve has been the biggest driver of equity prices in this cycle (unlike in 2000), when the Fed shuts off the money spigots, earnings will matter once again.
In any case, the stock market forecast for the next three months very much depends on the trajectory of the economy. It’s hard to envision the market staying resilient if U.S. GDP growth slows further. That’s improbable, should it go negative, and impossible if growth goes negative and the Fed keeps pulling liquidity out of the marketplace.
Reports Suggest Bearish Outlook for U.S. Stock Market in Second Half of 2017
For once, Wall Street analysts are bearish on stock market prospects for 2H 2017. That’s extremely unusual, and not necessarily a bearish sign. But still, the extreme pessimism should give investors pause.
Among 20 Wall Street analysts polled, the collective average year-end S&P 500 increase of just 0.6% is the least bullish since 1999. The most often-cited reasons for “despair” were stretched valuations and decelerating profit growth. (Source: “Wall Street Strategists Forecast Most-Bearish Second Half Since 1999,” Zero Hedge, July 1, 2017.)
Oddly enough, the bearish sentiments among analysts come after the S&P 500 gained 8.3% in the first half 2017 (1H 2017), which was the biggest 1H performance since 2013. Usually, Wall Street analysts keep trumpeting stocks as long as they keep rising. They’re in the business of keeping investors of all types—institutional and retail—buying. It’s rare for analysts to throw a wet blanket on optimism after such a strong half. Do they know something that the investing public doesn’t?
I reckon that they probably do. And, unlike the old days when Wall Street analysts could be eternally optimistic (regardless of whether they really believed it), credibility is more important today. Wall Street is facing increasing competition from so-called robo-advisors and passive investing strategies. The information gap between investment banks and the general public is historically thin. Some would argue that, for the first time in recent memory, ethics matter.
So what could Wall Street be afraid of that could lead to a U.S. stock market crash? Pick your poison. A flattening yield curve, slowing commercial loan growth threatening, declining housing and auto sales, an ultra-mature business cycle, historically low volatility (complacency)…There’s really a multitude of factors. With the stock market priced to perfection, any hiccup could threaten the status quo.
Either way, with the Fed taking away the punch bowl on asset purchases, combined with a slowing economy, which some believe will go into recession in 2018, this double whammy could hammer stocks. By this time next year, over $30.0 billion of monthly Fed liquidity will be pulled from the marketplace in so-called quantitative tightening. Picture this as quantitative easing in reverse. This will leave the stock market more reliant on its own devices. Now add the threat of an economic recession to the mix, and the recipe for market failure is high.
My stock market crash predictions could come into play if a recession takes hold in 2018. Since the stock market historically discounts future earnings six to 12 months in advance, a recession would collapse earnings by 50% or more. This would make historically high valuations of today look downright cheap in comparison. The market would re-price downward accordingly. Some bearish indicators are already signaling. A slowing economy would no doubt trigger more bearish indicators.
It seems to me that the market is set up to fail.
