The United States economy has been rapidly gaining ground after the election of Trump. Unemployment hit 4.6% – its lowest since 2007, and the S&P 500 breaches all-time highs almost weekly. On the flip side, assets like gold and bonds are in decline. Is now a good time to buy stocks, or is this the peak before another crash?
First off, it is impossible to predict a recession. But there are some indicators that the stock market may underperform over the coming years if not correct downward.
1. The Dollar is too strong. Dollar strength will help exports to the United States but cause losses to U.S based multinationals. This will pressure earnings downward in the United States.
2. Interest rates are beginning to rise. While interest rates stay near zero, money is too cheap for the stock market to crash. However, the Fed predicts three more rate hikes in 2017 alone. These rate hikes could lead to pressure in the stock market.
3. The economic climate in Europe and Asia is too uncertain. The global economy is interconnected, and no nation exists in a vacuum. If the United Kingdom’s Brexit ends up creating a recession, this may spill over into other countries – especially if the British banks are involved. In addition, the Italian banks are struggling. A spectacular crash in Italy would harm the Eurozone and as a result spill into the global economy.
4. Political uncertainty. The tension between the United States and China has become increasingly heated. Political uncertainty leads to fear in the markets and can push stock prices downward.
5. Black swan events. The crash in 2001 was based, in part, on the 9/11 attacks on the World Trade Center. Low probability events have the potential to shock the markets into a correction, especially when they are so high.
Conclusion.
While the market certainly looks attractive, it would be wise not to get carried away. There is too much uncertainty in the global economy for equities to be a sure thing. The outcome of the Brexit and Italian banking crisis still have the potential to harm the global economy. Political tensions in East Asia are coming to a head. No one knows if Trump will be a good president or not.
Investors should hedge their portfolio with gold in this time of uncertainty.
