The US stock market kicked off the new decade with a bang. But after ringing in the new year at all-time highs, the Dow Jones Industrial Average suddenly feels a lot more bearish.
Here are ten reasons why it may be time to put the brakes on those rosy 2020 forecasts.
After President Donald Trump ordered an airstrike that killed Iran’s top military leader, it wasn’t long before “World War 3” began trending on Twitter.
Similarly, Google searches for “World War 3” surged to all-time highs over the weekend, smashing the previous peak by an absurd margin.
The mania was little more than pure hyperbole. But the meteoric rise in Middle East tensions threatens to inject severe volatility into financial markets nonetheless.
Historical evidence suggests that stocks will eventually stabilize after jittery investors recover from the initial shock. The risk is that the fallout from Qassem Soleiman’s death serves as the domino that ignites a correction in a stock market already plagued by expensive valuations and lackluster corporate earnings .
US-Iran tensions will inevitably spark volatility in the Dow and other major stock indices, but some analysts say the market’s outlook was deceptively bleak even before Soleimani’s killing.
Chris Harvey, head of equity strategy at Wells Fargo Securities, warns that investors have become too greedy following 2019’s spectacular equities rally. Like Warren Buffett, he sees that as a bearish indicator.
“There’s a lot of things to like. Rates are lower, credit spreads are tighter, the Fed has been accommodative, we’ve got some sort of resolution with trade and tariff and sentiment has improved greatly,” he said. “And that’s what we don’t like.”
Bloomberg Senior Markets Editor John Authers published a fascinating article scouring historical data for clues about how the stock market could fare in 2020.
The data points are limited, but they should give Dow bulls pause. He concludes that stocks have a “narrow” path to future gains:
Speaking of data, the US economy isn’t looking particularly hot right now.
You might have missed it due to the sudden flare-up in US-Iran hostilities, but ISM’s latest PMI reading revealed that the manufacturing sector is in its worst shape since the tail-end of the Great Recession .
US factory PMI plunged to 47.2 in December, contracting even further from November’s disappointing print of 48.1. Readings below the benchmark level of 50 indicate contraction, and ISM Manufacturing PMI has now contracted for five consecutive months.
Economists predicted that manufacturing PMI would improve to 49. Instead, the metric plummeted to its worst mark since June 2009, the final month of the Great Recession that followed the 2008 financial crisis.
A deescalation in US-China trade war tensions was supposed to spur a manufacturing rebound, but the evidence indicates that more pain lies ahead.
Wall Street “perma-bear” David Rosenberg took a Twitter hiatus in late 2019 as he prepared to launch his new research firm, and it was fitting that one of his first tweets following his return came on the heels of December’s brutal manufacturing PMI data.
Rosenberg claims that the data refute Goldman Sachs’ recent claim that the US economy is “virtually recession-proof.”
He chalks the stock market’s feverish 2019 recovery to “liquidity-induced financial mania” and warns that the macro narrative reveals that this mania is running on “fumes.”
His advice? Buy gold . Because sometimes, “we just need a reminder that the world is actually a rather dangerous place.”
If there’s a silver lining for Dow Jones bulls, it’s that manufacturing isn’t the economic pillar it once was.
The services sector continues to account for a larger and larger portion of US GDP, which makes Tuesday’s ISM Non-Manufacturing PMI reading particularly important.
Services data have fluctuated in recent months, and some analysts have warned that this could portend a collapse in economic momentum this year.
That would put the US Federal Reserve in an awkward position.
The Fed cut interest rates three times in 2019 to support the economic expansion. The central bank snapped that streak during its December policy meeting, and the FOMC meeting minutes revealed that some voters are concerned that maintaining low interest rates will trigger more risky behavior.
A few participants raised the concern that keeping interest rates low over a long period might encourage excessive risk-taking, which could exacerbate imbalances in the financial sector.
In October, the International Monetary Fund (IMF) sounded the alarm on corporate debt , which has become a global problem. In the US, corporate debt has ballooned to nearly $10 trillion, thanks in large part to the low interest rate environment of the past decade.
Keeping interest rates low will only kick that can down the road and allow the bubble keep inflating. If US economic growth remains sluggish, the Fed may not be able to bring rates back up anytime soon.
Some economists, including James Knightley of ING, predict that the Fed may even institute more interest rate cuts in 2020 .
The stock market faces an avalanche of long-term downside risks, and the Dow’s near-term forecast doesn’t look entirely bright either.
Boeing (NYSE:BA), the 30-member index’s most heavily weighted stock, endured a bludgeoning in 2019 following the 737 Max scandal that refused to go away. Nearly ten months later, the aerospace giant’s problems continue to mount.
The New York Times reported today that regulators have discovered more design flaws in the scandal-ridden 737 Max , which has been grounded worldwide since March 2019.
While investigators fingered errant software as the culprit behind the two fatal crashes that killed 346 people, it appears that the 737 Max has faulty hardware as well. The wiring configuration in the plane’s tail may increase the likelihood of an electrical short, which could trigger a “catastrophic accident.”
Boeing claims that rewiring its 800 Max jets would be a “relatively simple” fix, but the last thing the company needs is another news cycle about the jet’s safety problems.
The 737 crisis has become increasingly expensive for Boeing. The Wall Street Journal reports that the company may finance those costs by taking on as much as $5 billion in new debt.
Boeing’s not the only core Dow stock under pressure today.
Apple (NASDAQ:AAPL) shares are fluctuating following a report that suggests the $1.3 trillion company’s most anticipated product may not launch in 2020 after all.
Susquehanna advised investors that while Apple’s first 5G iPhones should launch in September 2020, these devices won’t take full advantage of 5G speed. That’s because they’ll operate on a slower type of 5G network, which is only marginally faster than 4G.
Apple may not release its fastest 5G iPhones until early 2021, which could allow rival Samsung to launch its flagship 5G smartphone months earlier.
AAPL shares clawed back from their morning session losses today, but the 5G arms race could exert sustained gravity on the Dow’s biggest tech company.
The US-China trade war has taken a back seat in the headlines in recent weeks, but that doesn’t mean it’s no longer a threat to overextended stock market valuations.
While the two countries are still preparing to sign the “phase one” trade deal next week, there’s evidence that Beijing is less optimistic than President Trump about the long-term prospects for US-China trade.
The Chinese government’s recent stimulus injection suggested that mainland economists don’t foresee Washington and Beijing making further progress in subsequent rounds of negotiations. Now, there’s evidence that businesses are hunkering down for a marathon trade war too.
Growth in China’s services sector slowed to a crawl in December. Monday’s Caixin/Markit Services PMI reading came in at just 52.5 , down a full point from November’s print of 53.5.
That’s concerning because analysts are counting on China’s services sector to offset manufacturing weakness that could linger even after the US and China put the trade deal in writing.
With business confidence waning in both the services and industrial sectors, Beijing promised Friday to enact policy that will “trigger the vigour” of Chinese manufacturers. That may suggest that the government isn’t confident that the phase one agreement will help domestic businesses recover from the toll that the trade war has exacted from the economy.