Technically, US equities have peaked out and are losing steam in the short-term. In the last issue of Shares Investment, my perception towards the US market has turned negative as I foresee tremendous selling pressure. With the US market leading the decline, global equities including Hong Kong and Singapore also followed to drift lower.
Generally, market sentiments are extremely fragile. After peaking at 26,952 points on 3 October 2018, selling set in and quickly gained momentum. In merely three weeks, the Dow Jones Industrial Average lost 10.5 percent from its peak, to 24,122 points by 29 October 2018.
The sell-off was even greater for tech stocks. Tech-heavy Nasdaq Composite index lost 13.3 percent during the same period. Making investors even more uneasy, global e-commerce giant Amazon traded significantly lower despite an earnings blowout in the latest quarter. In 3Q18, Amazon’s earnings jumped 11 times to $5.75 per share!
The irony of Amazon shows that investors are losing their risk appetite. After all, Amazon was priced for perfection at 160 times its earnings and investors were expecting a lot of growth to materialise. Not surprisingly, investors must also be growing increasingly worried about whether Amazon can sustain its explosive growth in the current environment to support such a hefty valuation.
Over in China, A-shares have fell below 2016-low when the circuit breaker was introduced. The market rout is more severe this time: On 19 October 2018, the Shanghai Composite Index (SSE) lost the critical 2,500 psychological support level. This prompted four top Chinese financial officials, including Vice Premier Liu He, Governor of the People’s Bank of China Yi Gang, Chairman of China Securities Regulatory Commission Liu Shiyu, and Chairman of China Banking Regulatory Commission Guo Shuqing, to scramble to rally market confidence in that single day.
While the move brought Chinese investors some reprieve, the SSE index plunged after a two-day rally owing to continued weakness in the US market which dampened sentiments. Nearing to 6 November 2018 midterm elections in the US, Chinese investors are also bracing themselves in anticipation that Trump would ratchet up his rhetoric against China.
Behind the trade war campaign against China is Trump’s intention to force businesses to relocate their supply chains and entice manufacturing jobs back to the US. Trump has also made Americans growing increasingly cynical towards China’s “peaceful rise” to great-power status. With this uneasy sentiment weighing tremendously on the Chinese stock market, more noteworthy actions by the Chinese officials are needed inspire a sustained rally.
As the US is the leader in the global stock market, its deterioration would also trigger sell-offs elsewhere including Singapore and Hong Kong. As such, given the current weakness in the US market, any rebound presents an opportunity for investors to cash in their profit. In addition, investors should be warned against chasing the market during this period.
In the upcoming US midterm elections on 6 November, 435 seats in the lower House of Representatives will be up for grabs. Meanwhile, 35 out of 100 seats in the US senate would also be contested. In addition, local and state elections will also take place for 36 state governors and three US territory governors.
As the US midterm elections typically coincide with the second year of a US Presidency, the votes will reflect the consensus’ support for Trump and his government. The election in November is viewed with great significance. For one, while Trump’s Presidency has been filled with controversies, US politicians would be watching the results which reflect how Americans perceive Trump’s hard-line policies.
Over the past few weeks, Trump has been proactively campaigning to raise the image for himself and for Republicans. However, barely a week to the polling day, the US stock market plummeted to wipe out all the gains made since the start of the year.
For US investors, the most aggravating factor that caused the recent sell-off would be the outlook for interest rate hikes turning more aggressive again. Back in February 2018, Trump refused to reappoint former Chairwoman Janet Yellen for a second term but instead chose to nominate Jerome Powell. Yellen was nominated by Trump’s predecessor Barack Obama.
When Trump was first elected, he had publicly criticised Yellen on several occasions for being too hawkish, resulting in a strong US Dollar. Trump argued that a strong US Dollar made US goods less competitive. Seeing this misalignment of interest between Trump and Yellen, the latter’s failure to be reappointed was greatly within market expectations.
Meanwhile, everyone thought that Jerome Powell was a Fed dove picked by Trump. Under Powell, the market had initially expected the Fed to raise interest rate three times in 2018 at the start of the year. However, the Fed has already raised interest rates by three times and even went further by indicating their intent to hike interest rate one more time by end of 2018.
Adding more woes to investors, the Fed has also stated that interest rate hikes could extend into next year. Conventionally, the US central bank tend not to raise interest rate in the third year of a US Presidency. This is because US Presidential election occurs every four years and raising interest rate could weigh on the US economy, jeopardising the incumbent’s chances of winning a second term in the office.
The performance of a stock market is a leading indicator of the economy. When stock prices rise, it means investors’ outlook for future economic developments is positive. It was the reason why Trump claimed credit for the US stock market’s performance a few weeks ago when major indices kept making new highs before the tumble. Now that stock prices have plummeted, Trump literally stumped his own foot.
Until recently, Trump has begun to publicly criticise Jerome Powell, blaming him for causing the stock market rout. Making matters even more dramatic, Trump even said that the “Fed is his greatest threat” and that “maybe” he regretted nominating Powell. However, every time Trump makes any negative comments or remarks about the Fed or Powell, the stock market also reacted negatively.
In my memory, over the several decades in the US, no President has ever fired a Fed Chairperson. Even if they do not see eye to eye, the President typically waits out for the Fed Chairperson to finish his term. Firing a central bank chief mid-term is therefore a high political risk. Perhaps, the unpredictable Trump really has the courage to fire Powell.
On another matter, the US Federal Bureau of Investigation (FBI) has recently stepped up its investigation into China’s and Russia’s meddling of US midterm elections. Would there come a day when the FBI come policing Wall Street and persecuting investors for knocking down stock prices right before the elections and costing the Republican some votes?