Five countries are in a bear market - will the US follow?

Trade war rhetoric is weighing heavily on stock prices around the world, with equity indexes in countries that are particularly dependent on exports for economic growth being especially hard hit.

In the U.S., the S&P 500 has endured a 10% correction since reaching an all-time record high in intraday trading on Sept. 21, and has yet to make a sustained rebound.

14 major stock indexes around the world have dropped by 10% or more from their previous highs, and six of these, representing five different countries, have suffered bear market declines of 20%, as listed below.

5 Countries which are in a technical bear market:

China: Shanghai Composite, Hang Seng (Hong Kong)
Germany: DAX
Italy: FTSE MIB
Mexico: IPC
South Korea: KOSPI

Implications for Investors

In a similar way to economic recessions, bear markets in stocks can spread worldwide. Thus, the fear that, in an interconnected global economic and financial system, contagion that starts abroad is likely to infect the U.S. economy and U.S. securities markets as well.

The German DAX Index, which includes 30 major companies' stocks, has been sliding since reaching a closing high in January, beset by mounting worries about trade restrictions and slowing economic growth around the world.

FactSet data research shows that components of the DAX collectively derive 80% of their revenues from outside Germany, whereas constituents of the S&P 500 collect only 37% of their sales from beyond the borders of the U.S.

The German auto industry accounts for about 7.7% of that country's GDP, and is highly vulnerable to potential trade restrictions that would limit exports or disrupt its complex worldwide supply chains. Limits to its growth inevitably will have widespread negative ramifications for the rest of the German economy.

Meanwhile, in addition to his tariffs imposed on imports from China, President Trump has been threatening to impose a 25% levy on all imported vehicles and parts. This would be devastating for the German auto industry, which relies on the U.S. as a principal market.

U.S. companies and consumers also are also hurting from tariffs, which are raising their costs. The Wall street Journal reported that the total amount collected by the U.S. government on imports in October was above $5 billion, roughly double what the figure was in May. October was the first full month in which tariffs were collected on $250 billion worth of imports from China. Meanwhile, other countries are retaliating, and estimates cited by the Journal indicate that more than $1 billion in tariffs was paid on U.S. exports in October, making U.S. goods less competitive in foreign markets.

From a technical perspective, various analysts are citing the February Low of 2581 to 2633 as crucial support levels.

If these figures are breached to the downside, the probability that the U.S. enters into a bear market would be more probable.

What next?

A big question is whether U.S. stocks can avoid a bear market if China, the world's second-largest economy, and Germany, the biggest in Europe and the fourth-largest overall (Japan is third), already are in bear markets of their own. Moreover, the stock market slides in these countries are being propelled by deteriorating economic outlooks, partly due to the tariff war set off by President Trump.

Declining economic fundamentals abroad, in addition to retaliatory tariffs, are dampening the prospects for U.S. exports. This, in turn, will be a negative for the U.S. economy, U.S. corporate profits, and U.S. stocks.

What is your view? Will the U.S. manage to survive?

0 - Comments