*US equity markets are down only a few percentage points from their all-time high *Trade war is a serious concern, it should not be taken lightly
One question on every investor’s mind is why the US markets are in control of bull market especially when we have too much uncertainty on the trade war front?
There is no doubt that trade war isn’t going to help the US and neither China. But, Donald Trump, the US president, is determined to maintain his stubborn stance. He wants China to bend to his will. Clearly, he has taken a war with a wrong country because he cannot use the usual tactics of sanctions to make the government weak, and then use other resources to make the country to bend to its knee.
This is China, the second biggest economy of the world, if the country sneezes, the whole world catches the cold so picking a fight with a country like this is clearly a blunder, but Trump administration is in denial of this fact, and just for their own political motive, they are extending the war and willing to take it as far as they can.
At the same time, this is also a reality that the global markets aren’t paying much attention to this because after every few down days we see the bulls coming back into the market pushing the markets towards their all-time high and this has been the trend throughout this year.
For me, this doesn’t make sense, because the US markets aren’t cheap and neither have access to cheap money anymore which was the actual reason for the stock rally that we have seen.
So, the questions is: if we are going to see recession in 2019?
Well, by looking at the performance of the equity markets, it does seem like that there any chances of recession coming soon.
The year to date gains for the NASDAQ index sits at 14.65 percent, the Dow Jones index has soared 8.66% and the S&P 500 index has climbed 11.79%. So, by looking at these solid gains, it doesn’t look like that these markets are ready to move lower. But another perspective to measure the bullish sentiment is to see how far off these markets are trading from their all time high?
Well, the Nasdaq index is off by nearly 6.34% from its all-time high, the S&P 500 is 4.56% and the Dow Jones is down nearly 4.76% from its all time high. This tell us that the stock market is solid and there are no signs of panic.
Speaking of uncertainty, one of the biggest measure which shows a better picture of this is the Volatility index, the VIX index. It is down nearly 31.16% year to date, but it has recovered nearly 45% of its value from its lows which were formed back in April 2019.
Aha, now, we are getting somewhere, and the situation doesn’t look that rosy as it looked like before.
But, before we jump into any conclusion, lets also have a look at one more safe haven asset because the fact is that if there is anything cooking under the hood, then we should see the gold price moving higher. Well, the year to date gains for the yellow metal sits at 3.07%. This is despite the fact that the Federal Reserve has adopted a dovish stance towards their monetary policy.
To asses the situation for the safe haven demand is to measure the inflow and outflow of gold in the exchange traded fund. The SPDR Gold ETF has experienced its largest outflow since 2016, with an outflow exceeding $926 million in the first week of May alone. Having said this, the bleeding didn’t get much worse and this is because as of the last week, the inflow was $120 million which is better than the previous week’s outflow number of $303 million. So, clearly, investors are hedging bets and this shows that hedging is in place.
I always like to look at the economic data and try to see how the performance has been with respect to the forecast. This particular strategy gives a good idea how the economic health of the country is because if the economic recession is going to hit then the economic surprise index should start to roll to the downside. Comparing this particular index with the gold chart also gives another indication how institutional investors are placing their bets.
The Federal Reserve over in the United States intervened back in 2007 when the financial crisis hit. But, remember, the Fed is usually behind the curve and market participants have it right most of the time. Therefore, the Bloomberg US Economic Surprise Index is helpful in this situation. In the chart below, you can see that the economic data has started to perform extremely well since March.
Although, the current reading is -0.18, still in the negative territory, but the improvement in this index has been extremely strong. This is because back in March the index was well below the -0.50 level. Also, the correlation between the gold price and the Economic Surprise Index since October 2018 has been negative - one goes up and the other moves lower.
So, to conclude, I think there are serious concerns and factors like trade war should not be taken lightly. The US markets are too expensive and the geopolitical conditions aren’t stable so I think it is likely that we may see a recession soon especially if the economic number out of China aren’t true.