25 Oct

Dow Jones Could Be in Trouble, Recession Fears Rise

WRITTEN BY Vineet Kulkarni

The Dow Jones (DIA) and the S&P 500 (SPY) continue to linger around their all-time highs. Trade tensions between China and the US haven’t eased. The countries still haven’t reached a lasting resolution. Uncertainties amid rising recession fears will likely have a negative impact on the sentiment and hamper corporate investments for the next year and beyond.

Recession fears could take a toll on the Dow Jones

According to a survey from J.P. Morgan, business leaders in the Asia-Pacific region think that a recession and trade conflicts are the biggest risks for the next 12 months, according to a CNBC report on Wednesday. Many of the business leaders pinpointed global trade conflicts and the slowdown in emerging markets as major factors behind the risks.

However, J.P. Morgan expects the global economy to slow down more. J.P. Morgan doesn’t see a recession. Earlier this month, bond king Jeffrey Gundlach said that he sees a 75% chance of a recession before the 2020 presidential election.

According to a survey by Bank of America Merrill Lynch in October, 31% of the fund managers said that they expect a recession over the next 12 months. Meanwhile, 67% of the fund managers said that a recession isn’t likely. The survey found that global fund managers are mainly bearish on equities and preferred cash as an asset class.

Last week, the IMF said that the global economy could grow at the slowest pace this year since 2009. The world real GDP growth rate was -0.1% in 2009. The IMF’s chief economist said, “The global economy is in a synchronized slowdown.”

Where will the Dow Jones go?

Amid all of the gloomy views, US broad market indexes don’t seem to cool off. The S&P 500 has risen more than 20%, while the Dow Jones Industrial Average has risen 15% this year. Broad market indexes have touched these levels a few times this year. However, neither of the indexes has been able to break above comfortably.

So far, Apple (AAPL) and Microsoft (MSFT) have led the gains this year. They have risen more than 50% and 35%. Recession fears haven’t deterred tech investors. The Invesco ETF (QQQ) has risen 26% YTD. Notably, QQQ is trading close to its all-time high. To learn more, read Why Apple Could Have a Landmark Year in 2020.

Amazon (AMZN) reported weaker-than-expected third-quarter earnings on Thursday. To add to the woes, the company also issued soft guidance for the holiday season, which hints at a slowdown. To learn more, read Amazon Stock Tanks on Earnings Miss, Soft Guidance.

The Dow Jones Industrial Average (DIA) has also been trading close to its all-time high. Boeing (BA) has risen about 7% YTD. The company forms around 9% in the Dow Jones Index. Read Dow Jones Index: Record Highs or a Q4 Crash? to learn more.

Yield curve inversion

In March, the long-term Treasury yield curve fell below the short-term Treasury, which is known as an “inverted yield curve.” The data suggest that investors’ confidence in the economy is declining. Also, investors are concerned about future growth. In approximately the last seven decades, whenever the yield curve inverted, a recession followed in the next 12–18 months. However, there isn’t an absolute relationship between the two.

The yield curve between the three-month and ten-year Treasury yields uninverted this month. However, that might not mean that the issues are over. There are several economic indicators that paint a gloomy picture for the future. The recent un-inversion might be due to investors’ flight to safety to US Treasuries. They still look good compared to Japan and Germany’s yields.

Regarding equities, defensive sectors like consumer staples (IYK) and utilities (XLU) have remained in focus this year. As a whole, the sectors have risen more than 20% each this year.

The widespread slowdown is also a concern right now. The trade war seems to be at the core of the issues, which probably won’t get resolved soon. However, President Trump might want to resolve the trade war due to the presidential election next year.

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