After an unexpectedly bad year for the stock market, investors are looking for clues about what 2019 will bring.þþThe hope on Wall Street is that the underlying economy of the United States is sound, that the recent selling will burn itself out and that stocks will resume their record-setting climb. But the risk is that the plunge, the worst annual decline in a decade, could be the start of something more sinister.þþThe forces that pushed the S&P 500 down 6.2 percent in 2018 are still in place. The economy is still doing well, but it does not appear to be as strong as it once was. President Trump is lashing out at the Federal Reserve and the central bank’s interest-rate increases pose a risk to corporate profits and investors’ appetite for stocks. America’s trade war with China continues, and the technology giants that dominate the stock market face heightened scrutiny about their business practices.þþAs investors try to gauge the seriousness of these risks, stocks could lurch in different directions at each new event. A meeting of the Fed later this month, an earnings report in February or a trade-negotiation deadline in March could all prove to be catalysts for a big rise or fall.þþBut Wall Street’s top stock pickers are still expecting gains this year, even if they’re not quite as boisterous in their predictions as they once were.þþ“It could get more frightening before it gets better,” said James Paulsen, chief investment strategist at the research firm Leuthold Group. “But I think we survive for another run.”þþLast year was a reminder of how unpredictable stock markets can be. In January, with corporate tax cuts in place, the outlook for the market in the United States was great. And stocks did hit a record high in September, with Apple and Amazon becoming the first publicly traded American companies to be valued at more than $1 trillion. But 2018 was also turbulent, with markets falling sharply in February and again at the end of the year.þþThe S&P 500 narrowly avoided one grim milestone: a 20 percent drop from its high, a decline that would signal the start of a bear market. The index ended 2018 down 14.5 percent from its high point, and a bear market could yet be in store should stocks experience another decline similar to what they went through in early December. If that happens, the pessimism that has hovered over the stock market could leach into the rest of the economy, as companies grow wary of taking risks, expanding or adding more workers.þþHere are the factors that will help determine whether that happens this year.þþRising interest rates, and expectations about where those rates are headed, may have weighed on stock prices more than anything else in 2018.þþWith the United States’s economy humming, the Fed increased its target rate four times in 2018, pushing up borrowing costs across the economy. The yield on the 10-year Treasury note, which is the basis for debt like home mortgages and corporate loans, climbed to its highest level since 2011 before falling back. When borrowing costs rise too much, they can be restrictive. Companies and consumers pull back, and the economy suffers.þþIn the worst case, a recession could occur.þþStocks tumbled as investors became increasingly concerned that the Fed, under a new chairman, Jerome H. Powell, would raise interest rates too far and send a chill through the American economy.þþOnly more data on the state of the economy will ease the concerns about growth. If investors see the economy growing steadily, jitters over the Fed’s intentions and the recession fears that gripped stocks could fade.þþ“We’re going to see if the market was wildly hysterical about a recession,” said Ed Yardeni, chief investment strategist at Yardeni Research.þþIf not, then investors could hang on the Fed’s every move, and monetary policy meeting, in 2019.þþHeading into 2018, in the days after Mr. Trump’s tax cuts were enacted, investors were mostly buoyant about his presidency and tolerant of his unpredictable declarations on Twitter.þþThat bullishness persisted even after it became clear that Mr. Trump was serious about imposing restrictions on trading partners as a way of gaining concessions from them. But as the trade war continued, unresolved tensions with China started to become a concern, and Mr. Trump’s proclamations started to make investors jumpy.þþWhen Mr. Trump referred to himself on Twitter as “Tariff Man,” the message helped spur a drop of more than 3 percent in the S&P 500.þþIt wasn’t just the tweets about China that began to bother investors. Mr. Trump also roiled the markets with criticism of the Fed, which he blamed for the stock market turmoil.þþThis is a change for the market. When the investment bank RBC Capital Markets surveyed big investors in December about what kept them up at night, Mr. Trump topped the list (interest rates and the trade war ranked second and third).þþWhen it comes to Mr. Trump, investors have a lot to consider. They will have to weigh whether a partial government shutdown will dampen the economy; what a House of Representatives controlled by Democrats or staff turnover at the White House could mean; and what might happen if the United States and China can’t reach a trade deal by a March 2 deadline.þþThe trade war’s most evident impact so far has been in large overseas economies, which appear to be taking a turn for the worse.þþChina, Japan and the European Union showed signs of slowing down late in 2018, and reliable indicators of global growth like the price of oil and copper are flashing warnings.þþGrowth may accelerate if trade agreements are forged in 2019. But the problems could be deeper. China’s methods for pulling its economy out of a rut probably are not as effective as they once were. And the battle between Italy’s populist government and the European Union over the country’s spending plans may heat up again.þþThe European economy could also be hit hard if Britain crashes out of the European Union without an agreement that keeps trade flowing freely. That could be avoided if Parliament approves a withdrawal deal Prime Minister Theresa May has struck with the union. But that is no sure thing. Mrs. May, lacking the necessary support, was forced to delay a vote originally set for last month until mid-January. She has been trying, so far unsuccessfully, to extract changes from European officials in hopes of improving the chances of passage when that vote comes.þþIf Parliament ultimately rejects Mrs. May’s proposal, investors will probably remain nervous. And support may grow among lawmakers for a second referendum on whether Britain should leave the European Union. If that happens, stocks — including those in the United States — may rise on the hope that Britons vote to stay.
Source: NY Times
