- The equity market is a leading indicator of slowdown or recession, and US equities have declined sharply in the past 3 months.
- The PMI index for US, Europe and China points to a slowdown in the global economy, and global growth is likely to be muted in 2019.
- While the probability of recession is still not significant, equities can continue to decline with the dollar gaining in strength on tight monetary policies.
- It is advisable to increase exposure to gold and cash for the coming months, as risk-off trade is dominant in increasing global risk.
Equity Market Overview
The S&P 500 index touched 2018 highs of 2,944 on September 21, 2018. Subsequently, the index is down by 16.1% to current levels of 2,470. The sharp decline in equity markets in the United States has been associated with fundamental factors, and this article will discuss some of the critical factors that have translated into market correction.
Before talking about the fundamental factors, it is important to note that the S&P 500 index bottomed out at 683 on March 6, 2009. However, the US economy emerged from recession only in the third quarter of 2009. The point I am trying to make here is that the markets serve as leading indicators of potential recovery or recession.
With a significant market decline in the past 3 months, this article will discuss some of the key fundamental factors that have impacted equities. Further, the article will discuss the probability of US and global recession in the coming quarters.
The Dollar and Equities
Before talking specifically about the indicators of US and global economic activity, I would briefly like to discuss the dollar movement in the recent past.
The dollar index is currently at 96.4, and this is the highest level in the past 12 months. I wanted to mention this point as US equity movement is a function of dollar strength as well. Just to put things into perspective, when the dollar is strong, it is a symptom of tightening global liquidity. In such a scenario, equities trend lower. On the other hand, when the dollar is weak, it is a symptom of easing global liquidity, and in such a scenario, equities trend higher.