The S&P 500 – a broad market barometer for U.S. stocks – last hit a record high six-and-a-half months ago. Why has the stock market failed to close above its previous peak set back on January 29?
The short answer is that not everyone is buying the media-hyped “Goldilocks” scenario.
Granted, the country is enjoying the near-term benefits associated with tax cut stimulus and relatively low-interest rates. Employment trends have been favorable. Consumers are willingly spending both the money they have and the money they can borrow. And public corporations continue reporting strong profits-per-share.
On the other hand, the stock market may be in the process of forewarning a less-than-rosy year ahead. The investment community is scrutinizing the potential impact on everything from Federal Reserve policy to the Treasury bond yield curve, trade troubles to global growth weakness, stock valuation levels to forward return prospects, as well as uncertainty within key market internals.
Here, then, is a closer look at three of the biggest reasons that stocks are straining to reclaim January glory.
1. Economy: Growing, Growing, Growing… Gone.
The mainstream financial media generated an enormous amount of enthusiasm for the initial reading of second-quarter gross domestic product (GDP). And there’s little doubt, 4.1% year-over-year growth is a fine number.
Yet over the course of the current expansion, GDP growth surpassed 4% on four other occasions as well. A bona fide lift-off failed to launch after each one of those occurrences. Over the last three years, in fact, strong growth quarters have regularly been followed by weaker data. Is there a persuasive argument why this time should be different?
More notably, the U.S. economy cannot achieve sustainable above-trend growth (3%-plus) if the world economy is flatlining. Consider the reality that Q2 Eurozone GDP chimed in at an anemic 0.3%. That was its weakest performance since the second quarter of 2016. Meanwhile, the world’s second largest economy, China, witnessed its manufacturing sector’s PMI fall to 51.2 in July from 51.5 in June.
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