Stock Selloff

What is the market outlook now?


William Fisher

Yassine Elwafi ’19 believes that the recent declines in the stock market are most likely due to a correction in the stock market.

It seemed like the bull market, the time when shares in the stock market rise, would never end. From March 2009, following the Great Recession, the major American stock markets kept growing in value, year in and year out. It even got to the point where the run surpassed the bull market of the 1990s, when every single dot-com company achieved enormous valuations. In the past decade, The FAANG (Facebook, Apple, Amazon, Netflix, Google) technology stocks has led the way, with Amazon and Apple reaching trillion dollar valuations each.

Then October 2018 happened. The S&P 500, the most important American stock index, shed nearly two trillion dollars in value. The same FAANG stocks that led the bull market these last few years led its downturn. Those five stocks alone lost 300 billion dollars in market value, as Amazon and Netflix both saw decreases of about twenty percent, and Alphabet (the parent company of Google) lost ten percent of its value. These market declines continued into December 2018, where the S&P hit a 15-month low, and another important index, the Nasdaq Composite, nearly dropped into a bear market, which means it lost 20% of its value over the course of one year. It ended up being the worst December for the stock market since the Great Depression.

Although the stock market certainly posted some major losses, that does not mean the United States is headed towards a recession. Yassine Elwafi ’19, a member of Bronx Science’s Investment club, said, “It is important to keep in mind the historic gains that we have been enjoying these last few years. When put in perspective, the recent declines should be expected.” Not only that, the jobs report for December was a major success, with over three hundred thousand jobs added and more participants in the labor force. However, there may be uncertainties for the market heading forward, which could cause all major indexes to drop into bear market territory.

One factor that could affect stock markets is the policy set by the Federal Reserve, the central banking system of the United States. The principal responsibility of the Federal Reserve, known as the Fed, is to set interest rates. Low interest rates are made to spur economic growth, as they encourage individuals and businesses to invest, while high interest rates encourage savings and are used to prevent the economy from overheating. Since the Great Recession, interest rates have been low, but since 2016, the Fed has started raising them.

“It is important to keep in mind the historic gains we have been enjoying these last few years. When put in perspective, the recent declines should be expected,” said Yassine Elwafi ’19, a member of Bronx Science’s Investment club.

This has led many people, in particular President Trump, to express concern that the Fed is raising rates too early and may be harming the economy. This is especially relevant considering that the stock market declines continued into December, which is usually a good month for markets due to holiday season activity.

Nonetheless, there is some justification for the Fed to raise rates at this point. Mr. Noody, who teaches A.P. Economics, said, “The Federal Reserve has been steadily increasing interest rates in order to prevent an inflationary gap which usually accompanies an overheating of the economy. The unemployment rate is now at only 3.7%, a level which many economists view as potentially inflationary.”

While Fed policy is certainly an important issue when it comes to the stock market outlook, the major issue most investors are focusing on is the trade tensions between the United States and China, the two largest economies in the world. President Trump and President Xi Jinping of China have gone back and forth slapping tariffs on billions of dollars worth of goods in the others’ country. This is especially relevant to the decline of the FAANG stocks, as most of them conduct a majority of their production in China. “I definitely view Trump’s trade policies to be largely responsible for the stock market declines, both here and in China. Free trade benefits both parties involved as countries can specialize in those goods in which they produce best,” said Mr. Noody. While the two countries agreed to not impose any new tariffs until March 2019, there are already tariffs on goods in both countries in the hundreds of billions of dollars.

Both Fed and trade policy are going to continue to influence the market outlook for the next few months. The Federal Reserve will likely continue to raise rates each quarter throughout the next year, barring any significant economic shocks. Meanwhile, it is anyone’s guess as to what could happen with trade policy. Additionally with the growth of the Chinese economy having slowed recently, China may be more likely to seek out an agreement to end the rising tariffs. However, the conflict involving the Chinese technology company Huawei, in which the United States accused the company of violating international sanctions against Iran, may alternatively force China to solidify its position. That being said, especially when it comes to the stock market, no one can predict the future. “Who knows! Literally anything could happen in the coming weeks and months,” said Elwafi.