NEWSOct 19, 2018

Whether the US Stock Market Crash is a Brief Pullback, or the Beginning of the Storm?

Last week, the US stock market suffered a continuous plunge and triggered a big shock in global stock markets.

On Monday, US technology stocks performed poorly, with a decline of more than 1.5%, dragging down the three major stock indexes of the US stock market: the S&P 500 index fell 16.34 points, or 0.59%, to 2750.79 points, falling below the 200-day moving average support level. The Dow Jones Industrial Average closed down 89.44 points, or 0.35%, to 25250.55. The Nasdaq Composite Index closed down 66.15 points, or 0.88%, to 7430.74 points. In addition, the US Department of Commerce released data showing that the monthly retail sales rate in September was unexpectedly much lower than the expected 0.6%, only 0.1%, and the core retail sales fell to a 16-month low. The US federal budget deficit rose to $779 billion in fiscal year 2018, the highest level since 2012.

The three major US stock indexes suffered the biggest weekly decline since March this year, and Trump attributed this entirely to the Fed’s aggressive actions. The market is hotly discussing whether the plunge is the end of the bull market or a short-term correction, and there is no conclusion yet. Industry experts said that a number of risk factors, such as the Fed's interest rate hike weighing on markets, a possible global economic slowdown, rising Treasury yields, corporate earnings and trade agreements, are still playing a role and the stock market may not have hit bottom. Although the IMF lowered its global economic growth forecast for the first time in two years, from 3.9% in January to 3.7%, some analysts pointed out that the IMF's expectations are too optimistic. Robert Gordon, an American economist, said that a sharp slowdown in productivity growth in developed countries would put the global economy at risk, and the effects of a series of stimulus measures such as tax reforms in the United States would only be short-lived. Gordon pointed out that this means that the US market still faces a large downside risk.

What worries the market is that the wave of global stock market selling seems to be showing signs of a comeback. Mike Wilson, chief equity strategist at Morgan Stanley, predicts that the sell-off in the US stock market will only get worse. Wilson said in the report, "We still believe that the global risk asset market is now in a rolling bear market. The reason for this situation is that global liquidity problems are getting worse and worse, and growth has peaked.” Wilson believes that the S&P 500 will continue to trade between 2,400 and 3,000 in the next year. Although investors are difficult to choose stocks in this environment, they can still buy stocks that have reached a lower stock price.

However, David Kostin, the chief US stock market strategist at Goldman Sachs, believes that the sell-off is about to pass. The stock market's decline last week is normal and will not have a lasting impact. The stable fundamentals will support the stock price. “We believe that there is limited room for continued decline. The kind of callback that appeared in the market last week is very common. In spite of the sell-off, the fundamentals of the stock are still strong.” Kexin said in the report. Moreover, Kestin predicts that if the US tax reform passes, at the end of this year, the S&P 500 Index will rise 11% to 2850 points, and earnings per share(EPS) will rise 14% to $150; if the tax reform fails, the S&P 500 index will fall 5% to 2,450 points in the near future. In this regard, Goldman Sachs recommends that investors turn to growth stocks and focus on companies with strong balance sheets because they have better ability to withstand rising interest rates.
Get Desupline Insights delivered to your inbox.