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What's knocked markets off course? | What's knocked markets off course? |
(7 days later) | |
Just a few months ago, US financial markets seemed headed for a third year in a row of hefty increases. | Just a few months ago, US financial markets seemed headed for a third year in a row of hefty increases. |
But shares have tumbled since October, retreating to lower levels than at the start of the year. | But shares have tumbled since October, retreating to lower levels than at the start of the year. |
That decline continued on Friday, as weak economic data in Europe and China sparked a late afternoon sell-off, sending all three major US share indexes lower. | That decline continued on Friday, as weak economic data in Europe and China sparked a late afternoon sell-off, sending all three major US share indexes lower. |
The Nasdaq dropped almost 2.3%, the Dow fell 2% and the S&P 500 sank 1.9%. | The Nasdaq dropped almost 2.3%, the Dow fell 2% and the S&P 500 sank 1.9%. |
For those invested in US stocks, the double-digit gains in seven of the last 10 years may still feel pretty good. | For those invested in US stocks, the double-digit gains in seven of the last 10 years may still feel pretty good. |
But as Wall Street debate turns to just when a recession might begin, many investors are bracing for a rough patch. | But as Wall Street debate turns to just when a recession might begin, many investors are bracing for a rough patch. |
What's behind the shift in sentiment? | What's behind the shift in sentiment? |
1. The tech boom was overblown. | 1. The tech boom was overblown. |
At their peaks this year, the Dow and S&P 500 were up about 8% since the start of 2018. The Nasdaq had increased 15%. | |
But the stock market surge was always a bit suspect. | But the stock market surge was always a bit suspect. |
It outpaced other economic measures by a large margin and was driven by the tech sector, which accounted for roughly half of the gains on the S&P 500 up until mid-August of this year. | It outpaced other economic measures by a large margin and was driven by the tech sector, which accounted for roughly half of the gains on the S&P 500 up until mid-August of this year. |
Now some of the biggest winners - such as Apple and Facebook - have stumbled, dragging down the markets and making the weakness elsewhere more visible. | Now some of the biggest winners - such as Apple and Facebook - have stumbled, dragging down the markets and making the weakness elsewhere more visible. |
All three indexes are off 10% from their earlier peaks - a decline often considered a correction. | All three indexes are off 10% from their earlier peaks - a decline often considered a correction. |
Until tech recovers, a broader market bounce is unlikely, said Terry Sandven, chief equity strategist at US Bank Wealth Management. | Until tech recovers, a broader market bounce is unlikely, said Terry Sandven, chief equity strategist at US Bank Wealth Management. |
"Looking to 2019, volatility is likely to represent the norm rather than the exception," he says. "By many measures, the degree of investment difficulty is on the rise." | "Looking to 2019, volatility is likely to represent the norm rather than the exception," he says. "By many measures, the degree of investment difficulty is on the rise." |
2. Interest rates are rising. | 2. Interest rates are rising. |
US central bankers have been raising interest rates since 2015, moving away from the unusually low rates put in place during the financial crisis as economic growth rebounds. | US central bankers have been raising interest rates since 2015, moving away from the unusually low rates put in place during the financial crisis as economic growth rebounds. |
Analysts are worried about how much more expensive borrowing might get - and whether companies and households will be able to handle the increased costs. | Analysts are worried about how much more expensive borrowing might get - and whether companies and households will be able to handle the increased costs. |
Fears have been tempered recently by signals from the US Fed suggesting it may enact fewer rates rises in 2019 than previously expected. | Fears have been tempered recently by signals from the US Fed suggesting it may enact fewer rates rises in 2019 than previously expected. |
But some still worry about the risks from corporate debt levels, which have hit historic highs - with an increasing percentage of the loans made to companies with already large debt loads. | But some still worry about the risks from corporate debt levels, which have hit historic highs - with an increasing percentage of the loans made to companies with already large debt loads. |
3. US economic growth is slowing. | 3. US economic growth is slowing. |
US growth is expected to slow to 2.5% in 2019, down from about 3% this year, according to the IMF and Federal Reserve. | US growth is expected to slow to 2.5% in 2019, down from about 3% this year, according to the IMF and Federal Reserve. |
Some closely watched industries and financial indicators are already flashing warning signs of a more serious contraction. | Some closely watched industries and financial indicators are already flashing warning signs of a more serious contraction. |
In October, sales of existing homes had fallen more than 5% compared to 2017. Construction spending has started to slip and growth in consumer spending been less robust than expected. | In October, sales of existing homes had fallen more than 5% compared to 2017. Construction spending has started to slip and growth in consumer spending been less robust than expected. |
Meanwhile, business optimism is in retreat. | Meanwhile, business optimism is in retreat. |
Indeed, nearly half of US financial officers believe the nation's economy will enter a recession by the end of 2019, a recent Duke University survey found. | Indeed, nearly half of US financial officers believe the nation's economy will enter a recession by the end of 2019, a recent Duke University survey found. |
4. The White House is a wild card, especially its trade policy. | 4. The White House is a wild card, especially its trade policy. |
Investors loved US President Donald Trump's 2017 tax cuts. But his trade policy has them tied up in knots. | Investors loved US President Donald Trump's 2017 tax cuts. But his trade policy has them tied up in knots. |
In March, Mr Trump ordered tariffs on foreign steel and aluminium, as well as on billions of dollars worth in annual trade from China. He's threatened more, including on foreign cars. | In March, Mr Trump ordered tariffs on foreign steel and aluminium, as well as on billions of dollars worth in annual trade from China. He's threatened more, including on foreign cars. |
The tariffs have already raised costs for US companies - and economists warn they threaten to slow growth, adding to recession worries. | The tariffs have already raised costs for US companies - and economists warn they threaten to slow growth, adding to recession worries. |
Markets aren't sure about White House strategy, and an ongoing investigation of Mr Trump's election campaign ties to Russia has only added to uncertainty emanating from Washington. | Markets aren't sure about White House strategy, and an ongoing investigation of Mr Trump's election campaign ties to Russia has only added to uncertainty emanating from Washington. |
"If these investigations produce some sort of smoking gun that throws us into a constitutional crisis, that might prove destabilising," says Mark Vitner, senior economist at Wells Fargo Securities. | "If these investigations produce some sort of smoking gun that throws us into a constitutional crisis, that might prove destabilising," says Mark Vitner, senior economist at Wells Fargo Securities. |
5. Threats from overseas - like Brexit. | 5. Threats from overseas - like Brexit. |
The IMF expects the global economy to expand 3.7% in 2019, but the growth has become more uneven. | The IMF expects the global economy to expand 3.7% in 2019, but the growth has become more uneven. |
The US Federal Reserve recently flagged issues in Europe, China and emerging markets as some of the biggest threats to the American economy, with Brexit high on the list. | The US Federal Reserve recently flagged issues in Europe, China and emerging markets as some of the biggest threats to the American economy, with Brexit high on the list. |
Indeed, as much as US indexes are down, financial markets elsewhere have dropped even farther. | Indeed, as much as US indexes are down, financial markets elsewhere have dropped even farther. |
The Global Dow is down around nearly 9% so far this year, and the MSCI world index is down about 8%. | The Global Dow is down around nearly 9% so far this year, and the MSCI world index is down about 8%. |
In Asia, Japan's Nikkei 225 index has fallen about 6%; Hong Kong's Hang Seng index is about 13% lower in 2018. The Shanghai Composite has dropped more than 20%. | In Asia, Japan's Nikkei 225 index has fallen about 6%; Hong Kong's Hang Seng index is about 13% lower in 2018. The Shanghai Composite has dropped more than 20%. |
The Stoxx Europe 600 is off almost 11%. France's CAC 40 has dropped almost 9%, London's FTSE 100 has declined nearly 11%. and Germany's DAX is down more than 15%. | The Stoxx Europe 600 is off almost 11%. France's CAC 40 has dropped almost 9%, London's FTSE 100 has declined nearly 11%. and Germany's DAX is down more than 15%. |
So stormy seas likely lie ahead. | So stormy seas likely lie ahead. |
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