Why the stock market could crash… and why not

Why the stock market could crash… and why not
fak1911 / Pixabay

The market seems to have not a worry in the world, but at any given time, there are factors that could cause a crash. For now, the S&P 500, Nasdaq Composite and Dow Jones Industrial Average continue to reach new highs, but why could the markets crash? Some possible reasons include trade tensions, the coronavirus, a change at the White House, and sheer valuations.

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fak1911 / Pixabay

Why the markets could crash: trade tensions

One specter of uncertainty that’s been hanging over the markets for quite some time is trade tension. Some market watchers view the concerns as having abated following phase 1 of the trade deal between the U.S. and China, but the danger isn’t over yet.

The U.S. and China have been imposing tariffs on billions of dollars’ worth of imports since July 2018. Washington imposed tariffs on over $360 billion in Chinese goods, while Beijing retaliated with its own tariffs on over $110 billion in U.S. goods.

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In January, Washington and Beijing signed an agreement to start rolling back some of the tariffs and improve trade relations between them. China said it would increase U.S. imports by $200 billion over where they stood in 2017. It also said it would strengthen its rules for intellectual property. The U.S. agreed to slash in half some of the tariffs it had imposed on Chinese products.

However, most of those tariffs remain in place, and as a result, corporate leaders are still concerned about the trade climate between the U.S. and China. According to MarketWatch, analysis from natural-language processing firm Amenity Analytics reveals that S&P 500 companies are still worried about it.

Through Friday, about two-thirds of the companies in the index had reported their fourth-quarter earnings. In the earnings calls for those earnings reports, there were 184 mentions of “trade war,” “tariffs,” or related keywords.

Coronavirus still threatens

As of today, the coronavirus has killed over 1,100 people and sickened more than 45,000 people around the globe. The markets have so far shaken off any fears of a major economic slowdown, especially now that the number of new cases appears to be slowing. However, there is still reason to be concerned.

The global aviation industry is one of the hardest-hit sectors because many airlines suspended their flights to and from China. It may still be a bit too early to say that we are out of the woods where the coronavirus is concerned, however. It may be a while before the full impact of the disease is known.

Valuations could crash the markets

One other reason why the markets could crash is valuations. Major stock indices have been climbing higher and higher, and they show no signs of slowing down. More than 80% of the stocks in the S&P 500 were trading above their 200-day moving averages toward the end of January, and since then, stocks have continued to climb.

However, some have gotten concerned because the last time such a large portion of the index was trading at such high levels was in January 2018. The following month brought a massive correction of more than 10% lasting only days. We’re nearly halfway through February, and there are no signs of a correction yet, but that doesn’t mean it won’t happen.

Ralph Acampora, the so-called “godfather of technical analysis, told MarketWatch earlier this month that he believes the market has gotten too expensive and is overdue for a major correction. He also believes the coronavirus fears could serve as a catalyst for that correction.

He predicted that the stock market will fall at least 10% from its recent peak, which would be classified as an official correction.

Presidential change

Another potential problem that could cause the markets to crash is a change in the White House. There’s no denying that Wall Street has loved having President Trump in the White House, but some analysts have written about the potential problems that could occur if investors are unsettled by having a Democrat in the White House.

A Goldman Sachs poll found recently that 80% to 90% of respondents at the firm’s client conferences believed President Trump would be re-elected. The markets are already widely assuming he will be re-elected, so if the Democrats take the White House, it would be a major upset for investors.

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