Will the S&P 500’s historic bull run continue into 2020? It’s a question analysts are asking themselves, with plenty of market risks already identified.
Francois Trahan, head of US equity strategy at UBS Group AG, reckons we're in for a market decline, putting a 3,000 target on the S&P 500 for 2020 - 3% below its current level.
Over at Deutsche Bank [DB]
, recession risk figures heavily in its list of what traders should watch out for in 2020. The list, compiled by Chief Economist Torsten Slok, highlights indicators such as political tensions, weakening growth and trade wars as market risks for the new year.
So what should traders be looking out for in 2020? Here's our list of market risks.
1. US-China trade war continues
The US-China trade war has played havoc with the financial markets all year. Touching most industry sectors, the war has seen tech stocks and manufacturing particularly affected. This has led to traders dumping growth stocks in favour of more defensive options like real estate and banking.
The White House has placed more than $500 billion in tariffs on Chinese goods, with Beijing responding with $110 billion in duties for American products. In phase one talks aimed at defusing the spat, with Beijing pushing for a reduction in tariffs. So far, Trump has refused to budge, and with nothing yet signed, this could play out well into 2020.
Valuation of tariffs on Chinese goods placed by The White House
2. US elections and impeachment proceedings
So far the S&P 500 has largely ignored the ongoing impeachment proceedings as it goes from one record high to the next. And according to Greg Zappin, managing director and portfolio manager at Penn Mutual Asset Management, the proceedings will have little impact on markets.
Instead, Zappin places more weight on the upcoming US elections and who faces Trump:
"I think the focus on who the democratic nominee is and what the policy prescriptions are, are going to really move the market. I think that's still the big thing."
Historically, there’s a market decline in the run-up to an election as uncertainty mounts over who's going to be in charge of the economy. This is followed by a post-election rally. Expect some market volatility during what is sure to be a bitterly fought election contest next year.
“I think the focus on who the democratic nominee is and what the policy prescriptions are, are going to really move the market. I think that's still the big thing” - Penn Mutual Asset Management managing director Greg Zappin
3. Brexit uncertainty persists
In October, both UK equities and sterling surged on hopes that the UK would leave the EU with a deal.
However, Boris Johnson’s decision to call an election puts the threat of a no-deal back on the table.
Banks have been affected by the uncertainty around Brexit, with slowing mortgage and credit business hurting profit margins. Should the December election end in another hung parliament, Brexit uncertainty will likely continue to weigh on the UK economy.
4. Recession risks in advanced markets
Weaker growth in developed countries has increased the likelihood of a global recession, according to the UN.
The UN’s trade and development body said that 2019 saw the weakest expansion in a decade with the risk of outright contraction in the new year. Global growth will fall from 3% in 2018 to 2.3% this year according to the report.
Some countries like Germany have already slipped into recession, with the UK dangerously close to one. In September, services, manufacturing and construction sectors all contracted according to IHS Markets.
Already the Fed has tried to counter recession risk in the US by lowering interest rates. But if trade wars, market volatility and a weakening in consumer spending continue, then equity markets could start to shed value in 2020.
5. Antitrust and tech regulation
Yet ongoing antitrust investigations in the US and Europe are gaining momentum. Federal regulators have begun a probe into Google's 'Project Nightingale' deal with Ascension Health. While back in September, the US Justice Department announced its fourth antitrust probe into Facebook. Apple and Amazon are also facing their own antitrust investigations.
According to Mad Money host Jim Cramer, these investigations could pose more of a threat to earnings than the US-China trade war:
“When it comes to FAANG, my acronym for Facebook, Amazon, Apple, Netflix and Google, now Alphabet, time and government are far more important to their future earnings streams than the Fed or the trade war with China.”
“When it comes to FAANG, my acronym for Facebook, Amazon, Apple, Netflix and Google, now Alphabet, time and government are far more important to their future earnings streams than the Fed or the trade war with China” - Jim Cramer