US equity outlook: trade wars and seasonality battle it out
As equities look to recover from their early October volatility, what is the outlook for US stocks?
Now that we have had a third 5% drop for the year, are indices ‘in the clear’ for a strong run into year end?
On average, the S&P 500 suffers three 5% drops in a year. Some years see more than this, and others, such as 2017, barely even see one such move. No one year in the stock market is exactly like any other. But investors and traders need to be prepared, and it helps to know that a market tends to see periodic bouts of volatility, and downside moves, even as it continues to move higher.
S&P 500: a retrospective as we move closer to 2020
2019 has been a textbook year for investors. It began with markets recovering from a sell-off in the fourth quarter (Q4) of 2018. From January until May the market rallied strongly, and then a swift correction took place. This was followed up by a rally in June and July, which was itself followed by a pullback into August.
For the S&P 500, which is the global benchmark index, the ‘best’ months of the year are the October–April period. Historically, the strongest returns occur in this period, while the May–September period is at best one of flat performance for equities. From October equities, on average, rally into the end of the year, and so 2019 may follow this pattern.
The US-China trade war could slow things down
The wildcard here is the US-China trade war. This has the potential to unseat the rally and cause a bigger downturn in equity markets. As investors debate how close the US to recession, we can see that signs of a possible turn higher in unemployment claims and a downturn in new home sales, both signs that a recession is getting closer. A US-China trade war has the potential to spark a US recession, and it is already feeding through to US economic data.
US earnings on the rise for now
US earnings continue to grow, although at a reduced rate, providing a cushion for any downturn. In the long term, earnings drive the stock market, with periodic crises providing the short-term volatility that provides strong buying opportunities. A continued recovery in earnings would be the most positive development for the market, helping to soften the blow of a continued US-China trade war.
In the short term, the outcome of the US-China talks will determine the moves in equities. However, seasonality is now strong for the next six month at least, providing a more positive longer-term outlook. It would be foolish to rule out new record highs for the S&P 500 by year end.
IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.
The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.
No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk. Please see important Research Disclaimer.
Please also note that the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.
Take a position on indices
Deal on the world’s major stock indices today.
- Trade the lowest Wall Street spreads on the market
- 1-point spread on the FTSE 100 and Germany 40
- The only provider to offer 24-hour pricing
Live prices on most popular markets
- Forex
- Shares
- Indices
See more forex live prices
See more shares live prices
Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.
See more indices live prices
Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 20 mins.