These factors generate short-term risks in the stock market, which is reflected in investor trends and in the light of various current economic indicators, at a stage when the markets are in a state of uncertainty.
In light of this scene, a bunch of the same questions arise; The most important is whether these declines in US equities are “temporary†or are they continuing for a longer period? How will the defaults of regional banks in the United States and the debt ceiling crisis affect equities in the short term? And what are the factors that depend again on the return of the rise in equities?
A report published by the British newspaper “Financial Times” indicates that in addition to doubts about the future movements of the American Federal Reserve, the banking meltdowns (the banking crisis which began last March and caused widespread fears on the markets), as well as the looming political confrontation over the Debt ceiling, these are all factors of concern, in terms of short-term market risk.
“Perhaps the long-term risks to the relative outlook for US equities versus other markets should appear more on investors’ radar,” the report added.
The report quotes Karen Carniol Tambor, chief investment officer of US investment management firm Bridgewater, speaking at the annual meeting of the Milken Institute in Los Angeles this week:
Ratings in the United States are much worse than anywhere else. Karen painted a picture of the US market as “the place to be but not now”. She said that usually when you have businesses that have been profitable for a long time, that’s taken into account. American tech in particular kind of won it all, and now it’s fully factored in. Karniol Tambor asserts that “it is hardly possible to have more American dominance in investment portfolios than there already is.
The report cites data from Absolute Strategy Research, which reveals that “U.S. equities now control just under half of global market capitalization, up from about a third in 2010.”
In recent months, other stock markets have outperformed the United States. The S&P 500 is up 8% in six months, but the FTSE Eurofirst 300 is up nearly 25% in dollar terms and even Japan’s blue chip stocks are up 16%.
However, US valuations remain strong; Because one of the “long-term” measures is the cyclically-adjusted price-earnings ratio. This metric compares prices to average earnings over the previous decade and is often cited by investors who focus on the long term as a key metric.
Temporary or continuous declines
Professor of Economics at the Kogod School of Business in the United States, Jeffrey Harris, said in exclusive statements to “Sky News Arabia Economy”: Historically, the US economy (and the stock market in turn) has resisted over long stretches, explaining that in the current year, US markets are actually higher than they were in 2022, even when the past week has shown extreme weakness.
He adds: “(…) Investors seek US equities as long-term investments, and pension funds, investment funds and insurance companies invest for the long term on behalf of individuals, for example.”
He believes that market dips are temporary, and we never know when the market will turn, talking about a number of factors influencing these trends:
There is evidence that the Fed’s interest rate hikes (which aim to stifle inflation) will kill jobs, and they have certainly caused some banks to fail. Rising rates will necessarily result in higher mortgage rates (and higher reset rates for existing variable mortgages), so U.S. consumers and businesses now face higher borrowing costs , which will affect future economic growth.
He continues: But I am convinced that the stock market will recover at least in the medium term in the worst case over the next few years. However, it should be noted that higher rates will likely translate into lower growth, so we can expect below-average returns (less than 7%) in the stock market over the next few years.
Regarding the impact of current risks (bank failure and debt crisis in particular) on future expectations of US equities, Harris explains that:
Recent bank failures are linked to rising interest rates, which forced some banks to sell fixed-income assets at a loss on assets they intended to hold to maturity. There is always a risk that other financial institutions will succumb to these same risks. It looks like the FDIC and the Federal Reserve Bank (FDIC) are watching the sector closely and working on solutions. These bank failures are undermining confidence in the economy, and Michigan’s consumer confidence survey now shows widespread pessimism. But the banking system as a whole looks solid.
Debt crisis
He adds: The impending debt crisis is also affecting the economy, but it’s very political, so if politicians can work out their differences, we won’t see any significant impact.
And he points out that “every time the debt ceiling is raised, the markets take notice. And just as with businesses or homes, higher debt indicates greater risk, so the he increase in risk is also reflected in expectations for US equities…risky stocks are trading at a discount, so the outlook for the riskiest country also points to a lower-than-historic outlook for the stock market.
Factors Influencing Investor Attitude
The aforementioned Financial Times report highlights, in the context of the challenges facing the US stock market, a number of destinations influencing investment trends related to the US market, including the “US dollar”, as the currency is an excellent haven for attracting funds from abroad to US stocks and bonds.
Between March 2008 and September 2022, the dollar rose 60% against a basket of its peers, and it rose even during the global financial crisis caused by the United States. However, this year it has fallen 4% since turmoil first hit U.S. regional banks in March.
Another factor was “reluctance to invest more money to work in the United States” in favor of finding another big market with long-term potential.
The report refers here to the eurozone, which is “certainly experiencing an unexpectedly dynamic economic moment, given the relief that Russia’s war with Ukraine is not hitting it the hardest.” However, taking money out of the US over the long term “means that the investor can be confident that returns in the Eurozone will regularly outperform those in the USâ€.
There is also Asia, and within China itself, where the recovery of these equity markets continues, but with a marked lack of enthusiasm on the part of American investors, particularly as geopolitical tensions escalate.
Bank failures and debt crisis
For his part, Ahmed Moati, Executive Director of Virgin International Markets, said in exclusive statements to “Sky News Arabia Economy” that the decline in stock markets is a natural thing in light of economic conditions, and represents a “temporary dip” in US stocks.
He adds, “The United States of America is the largest economy in the world, and the largest economy that supports investment, and so any known declines are just new opportunities to buy later, and so the question is, when will stocks go up, and what are the factors influencing that?”
Muati responds: “In my personal estimation, the appropriate time for US equities to enter a new up cycle and an end to the current declines is tied to the end of the monetary policy tightening cycle. According to economic data, before to enter the rate cut stage.
And the CEO of Virgin International Markets, vi market, evokes, in his interview with “Economy Sky News Arabia”, the consequences of the debt crisis on the American stock market and its repercussions, explaining that “if the crisis is already confirmed in If there is disagreement on a debt ceiling hike package, there will be a real problem, overshadowing the sharp declines in all three US indices, with a possible drop of at least 10%, but this is very unexpected, on on the basis that the current crisis represents maneuvers between the two parties, and that the issue is linked to purely political files.
As for the impact of “bank failures”, he recalled the recent declarations of the American Federal Reserve, in which he affirmed the solidity and the durability of the banking system, and pointed to the policy of mergers and acquisitions, represented by the acquisition from small and medium-sized banks to large banks, as happened with Silicon Valley and First Republic Bank.
Moati adds: “Based on these messages, current indications indicate that investors’ fears regarding the banking crisis have begun to fade, on the basis that the issue has become linked to a well-known scenario regarding the intervention of the large banks to acquire troubled companies. banks, and therefore depositors’ investments are safe, while the only fear is the exposure of one of the ten big banks to one of the event of default, which casts a terrible shadow on US stocks and confidence dealers.
An economist and financial risk expert from the United States, Muhyiddin Kassar, says in a statement to “Sky News Arabia Economy”: “I believe that the US stock market will go through a downward phase (does not necessarily mean a fall), to begin to recover at the end of September after some strong vibrational movements.” .
He stresses that these anticipations “depend on the continuation of the current situation”, but stresses at the same time that “changes in the federation’s tax policy may change this”.
And he adds: “As for US equities in general, as long as the Fed buys assets, we will see a stock market phenomenon similar to the situation in 2011 (when the markets were under great pressure due to the crisis of the debt in the euro zone and the consequences of the global financial collapse).
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