Investors fear US stock market rally about to end

US President Donald Trump at a rally last month at the Giant Centre in Hershey, Pennsylvania. Markets will increasingly focus on the US presidential race as Democratic primaries begin and the general election in November draws closer. Several promine
US President Donald Trump at a rally last month at the Giant Centre in Hershey, Pennsylvania. Markets will increasingly focus on the US presidential race as Democratic primaries begin and the general election in November draws closer. Several prominent investors have warned of steep stock declines should a progressive candidate secure the Democratic nomination and defeat Mr Trump. PHOTO: AGENCE FRANCE-PRESSE

Geopolitical risks, like escalation of US-Iran tensions, just one on list of worries for 2020

NEW YORK • The United States stock market's relentless drive higher has caused some nail-biting on Wall Street that the rally is about to end. Geopolitical risks - such as the latest escalation of US tensions with Iran - are just one on a list of worries for this year.

Stocks ended 2019 with their best year since 2013, with the S&P 500 rising nearly 29 per cent.

That has put the S&P index at just under the 3,260 level that a Reuters poll forecast the index would achieve at the end of this year.

Some investors are now increasingly nervous that the year-end "melt-up" in shares will turn into a scary meltdown.

Here are some of the risks preoccupying Wall Street as this year gets under way:

PROMISED PROFIT REBOUND FLAILS

The stock market's stunning 2019 gains came despite a lacklustre year for corporate profit growth, but performance may suffer if earnings lag this year.

The stock market's stunning 2019 gains came despite a lacklustre year for corporate profit growth, but performance may suffer if earnings lag this year.

Fourth-quarter reporting season starts in the coming days and results are expected to be anaemic, with S&P 500 earnings seen down 0.3 per cent, according to Refinitiv data.

But analysts expect S&P 500 earnings to rise 9.7 per cent this year.

There are some sceptics, notes Horizon Investment Services chief executive Chuck Carlson, who said that bears are "still having some negative thinking that corporate profits aren't going to be all that great (this year) because the economy is probably going to be a little softer".

Indeed, data last Friday showed the US manufacturing sector contracted last month by the most in more than a decade.

US-CHINA RELATIONS SOUR

An initial US-China trade agreement provided a year-end boost for stocks, but any hitch in the "phase one" deal could rattle markets.

"The rivalry between the US and China hasn't gone away," UBS Global Wealth Management chief investment officer Mark Haefele said in a recent note.

"Investors will be alert for any sign that tensions are re-emerging, or either side is dissatisfied with the implementation of the phase one agreement."

 
 

LESS FED SUPPORT

Some point to the US Federal Reserve as a trigger.

"When the Fed injects money, funds generally flow to the best-returning market," said analysts at Bianco Research in a recent note. "The big question is, what happens when the Fed ends T-bill (Treasury bill) purchases and repo (repurchase agreement) support?"

Last October, the Fed announced that it would start buying about US$60 billion (S$81 billion) per month in Treasury bills to ensure "ample reserves" in the banking system, a programme that would continue at least until the second quarter. The Fed would also continue to support the short-term lending markets by offering daily operations in the market for repos.

"Be wary of a correction in the first half as Fed balance sheet increases wane," said National Alliance Securities international fixed income head Andrew Brenner in a note.

VOLATILE US POLITICAL LANDSCAPE

Markets will increasingly focus on the US presidential race as Democratic primaries begin next month and the general election in November draws closer. Several prominent investors have warned of steep stock declines should a progressive candidate secure the Democratic nomination and defeat US President Donald Trump. Of particular concern is if Democrats sweep the presidency and both Houses of Congress, paving the way for major policy overhauls.

Investors currently see little market risk from the impeachment of Mr Trump. That could change if US senators in Mr Trump's own Republican party begin defecting against him in significant numbers in the Senate trial.

OVERLY OPTIMISTIC INVESTORS

As the market soared last year, so did investor bullishness about equities despite rising valuations, a potential sign to be wary.

According to the AAII Investor Sentiment Survey, bullish sentiment rose in the Dec 19 reading to its highest level since October 2018, just before the market endured a year-end swoon.

Such bullishness has since pared back to around historical averages.

"Some of the sentiment readings have turned pretty aggressively," said Mr Carlson. "While we may not be there yet, that would be something to watch as we go into the early part of 2020, (whether we) are getting a little too excited or too ebullient on this market."

 
 

GEOPOLITICAL TENSIONS AND AN OIL SHOCK

Stocks were hit last Friday and investors moved into safe-haven assets after a US air strike in Baghdad killed Iran's most prominent military commander.

"Geopolitics has come back to the table and this is something that could have major cross-asset implications," said Lombard Odier Investment Managers chief investment strategist Salman Ahmed.

Oil prices continued to spike yesterday and a surge in the commodity remains a concern. Aside from the situation in Iran, Stifel's head of institutional equity strategy Barry Bannister said that Saudi Arabia may look to boost oil prices as it seeks to list oil giant Aramco on a larger exchange.

Last month saw West Texas Intermediate rise more than 10 per cent and Brent advance nearly 6 per cent.

With the dollar index falling 3 per cent in the fourth quarter, continued weakness could result in a further climb in crude prices, and stagflation may result if the dollar continues to weaken while crude prices continue to accelerate.

REUTERS

A version of this article appeared in the print edition of The Straits Times on January 07, 2020, with the headline 'Investors fear US stock market rally about to end'. Print Edition | Subscribe