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Is a US Market Crash Inevitable in the Second Quarter?

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The broader market

On April 9, the broader market was trading on a negative note for the second straight day. The Dow Jones Industrial Average (DJI) posted a 1.9% gain last week after seeing a 1.7% rise in the previous week.

In contrast, the Dow started this week on a choppy note, with a fall of 0.3% on April 8, while the S&P 500 Index and the NASDAQ Composite Index saw minor gains of 0.1% and 0.2%, respectively.

A little background

This year, the S&P 500 Index (SPY) posted its best first-quarter performance in the last two decades. Other key US indexes began 2019 with sharp recoveries, with the Dow rising 11.2% in the first quarter after posting an 11.8% fall in the fourth quarter of 2018.

Among the key US indexes, the NASDAQ Composite Index (QQQ) posted the sharpest loss of 17.5% in the fourth quarter of 2018 due to a massive sell-off in tech companies including Apple (AAPL), Qualcomm (QCOM), Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Advanced Micro Devices (AMD).

Possibility of a US market crash in the second quarter

There are a few similarities between the fourth quarter of 2018 and the second quarter of 2019. In the fourth quarter, the broader market sell-off was triggered primarily by factors such as investors’ low expectations for the third-quarter corporate earnings season, worries about US-China trade tensions, and rising interest rates in the United States.

In the current quarter, Wall Street analysts expect the first-quarter corporate earnings season to disappoint investors. According to a recent FactSet report, analysts expect all S&P 500 companies combined to report a 3.9% YoY (year-over-year) decline in the first quarter of 2019, which would be the first YoY decline in the index’s earnings since the second quarter of 2016.

Earlier today, President Donald Trump said that the United States “would impose tariffs on $11 billion of products from the European Union,” Reuters reported. While uncertainties about the outcome of ongoing US-China trade negotiations are already keeping investors on their toes, an escalation of the trade tensions between the United States and the European Union could make the situation worse.

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