President Donald Trump

The slowing Chinese economy and America’s trade war with China were among the top drivers of the broader market sell-off in the fourth quarter of 2018.

Most investors were hoping that the Federal Reserve would slow the pace of its benchmark rate hikes last quarter.

Recession Fears, Delays in China Deal May Trigger a Q2 Sell-Off

Recession fears

While the Fed’s tone has turned dovish in its recent meetings, signaling no rate hike in the near term, the shift has failed to please investors. Most investors consider a sudden change in the central bank’s view on the economy to be an early indication of upcoming economic woes—and possibly a recession.

To add to investors’ worries, recent weakness in US economic indicators, including consumer spending, consumer confidence, and the factory activity index, has signaled a slowdown in US economic growth. In February, the Institute of Supply Management’s national factory activity index fell 2.4 points to 54.2, “the lowest reading since November 2016,” Reuters reported.

Delays in China deal and a sell-off in the second quarter

The negative impact of the slowing Chinese economy (FXI) has already hurt the future growth prospects of many US companies, including Apple (AAPL), General Motors (GM), Ford Motor Company (F), Tiffany & Co. (TIF), Qualcomm (QCOM), Micron Technology (MU), Yum! Brands (YUM), NVIDIA (NVDA), and Intel (INTC). Slowing US economic growth is likely to pressure US businesses even further.

Most US companies with large exposure to the Chinese market are also hoping for the US-China trade war to come to an end. Further delays in a US-China trade deal—such as those we’ve seen in the last couple of months—are likely to make the situation worse for investors in the second quarter, which could result in a massive broader market sell-off.

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