The Dow Jones fell by another 200 points on Thursday and has now deleted nearly 700 points from its remarkable 2019 recovery, all within the first week of March.
More troublingly, the struggle of the Dow comes during a period in which fundamental factors including jobs growth and productivity growth remain strong while geopolitical risks have declined.
Despite solid fundamentals, the Dow has been on a consistent decline throughout March, unable to defend the 26,000 point level.
Analysts generally attribute the downside movement of the Dow and the rest of the U.S. stock market to five major factors:
According to Vanguard CIO Greg Davis, the increase in the prices of U.S. stocks throughout the first two months in 2019 along with an overall decline in U.S. equity market returns over the next decade have made the stock market less compelling for retail investors.
“If we look forward for the next 10 years, our expectations around U.S. equity markets is for about a 5 percent median annualized return. Five years ago, we’d have been somewhere in around 8 percent,” Davis told CNBC. “Our expectations have clearly come down”
Late last month, traders demonstrated concerns towards the downside earnings revisions of major corporations and warned investors that an extended decline in earnings could put an end to the bull market.
The fear of investors towards the weak earnings of companies in key sectors and the increase in the prices of stocks when U.S. household net worth has actually fallen by $3.73 trillion is considered to be the primary factor driving the Dow Jones downward.
The relatively high federal debt in the U.S. has only mounted more pressure the stock market, and in times of high financial distress, Christina and David Romer, economists at the University of California at Berkeley, said that growing debt could intensify market downturns.
The researchers wrote:
“Countries should work to keep debt low as an insurance policy for future crises and to minimize market risks. But confronted with high financial distress, domestic policymakers and leaders of international organizations should not let debt loads drive the fiscal response unnecessarily. To do so leads to much worse post-crisis output losses.”
Countries like China have shown that they are willing to go to great lengths to keep a lid on the nation’s leverage and debt.
As such, rather than using its housing market to bump up its domestic market as it did in the past, the government of China has taken the route of securing a trade deal with the U.S. to alleviate pressure on the Chinese market.
The result has been astonishing for China so far as the SSE Composite, which represents all stocks traded on the Shanghai Stock Exchange, is concerned. That index has surged by well over 25 percent in the past two months.
The decline in household net worth and the increase in the prices of stocks are issues that could resolve themselves over time.
The question remains, can a comprehensive trade deal trigger the Dow to recover if signed by March 27 as expected?
Already, due to the optimistic prospect on the trade deal, U.S. financial market economist at Oxford Economist Kathy Bostjancic said that the market had seen a pickup in productivity.
“We’ve had a nice little pickup in productivity, and it helps offset some of the rising wage and input cost pressures that companies are facing now,” she said.
A full trade agreement would remove significant pressure on companies in the agriculture, auto, and manufacturing industries, and even if the prospect is priced into the market, a full agreement is likely not.