the state of the economy of the USA and the stock market
This report discusses the state of the economy of the USA and the stock market in 2020. It highlights that economic growth in the USA is slowing down than expected; in this regard, it highlights that the inflation rates are spiking, especially oil. The earnings are losing momentum, while most stocks are being overvalued. All these changes are a result of America’s involvement in hostilities, especially with Iran and trade wars with China and the looming 2020 elections. The conclusion sums it all.
Discussion
The USA has been involved in geopolitical risks with countries; for example, the assassination of an Iranian Commander in January has brought prospects of war. The effect of this instance is a spike in oil prices, which affects the country’s economy negatively.
Geopolitics is always a reason for taking caution because they are random and get side-lined in a bull market (Lewis, 2020). In this regard, it is expected that a violent escalation of hostilities between the USA is expected to continue in the coming days, which is a significant caution for the stock market (Wahl, 2020). Therefore, geopolitics has jumped to become one significant worrying issue for economists, which is a reminder that the stock market reaching for all-time highs is facing risks such as high stock valuations, and a weakening of economic expansion.
Secondly, the looming elections and impeachment motion have created a divided people. Thus the increasing aggression in politics is taking a toll on consumer confidence, eventually slowing their spending. And this action has kept the economy relatively stagnant since last year.
The 2020 elections could be more combative than it was four years ago, and this effect could develop an obstruction on retail sales (Loop Capital, 2020).
Third, even though trade tensions with China seem to ease with the promise of signing a stage one deal with the Chinese president in January, there are still several differences which are yet to be solved between the two nations to create a positive impact on the economy. Besides, it is not, however, clear what prospects the phase one deal has on the USA economy.
All the above happenings could have an effect on the economy and stock markets in the following ways.
The economy is proving weaker than expected
Neither will the economy land into a recession nor a gangbuster growth this year; most economists argue that even though the economy is growing, it is moving at a slower rate. (Lewis, 2020). The fiscal incentive from the Federal Reserve System (Fed) cuts and tax reform is weakening, and there is not a lot to be expected, especially in the key interest rates.
However, a sharp increase in inflation might force the Fed to increase interest rates upsetting a market adapted to ultra-low standards. This action might also pressure firms with large debt loads.
On the contrary, the risk of an economic downturn could push the Fed to lower interest rates, which could send a mixed signal to markets. For instance, lower rates usually increase stock prices, but if the Fed cuts are perceived to be emergency efforts, the investors could lose confidence in the economy, which could affect the stock prices (Lewis, 2020).
From this situation, we could observe that the fiscal stimulus from Fed cuts and tax reforms is weakening, and there is less to expect (Amadeo, 2020).
A probable spike in inflation
Essential commodities, including oil, have increased in prices, and it seems the prices are likely to upsurge throughout the year with the current hostility in the Middle East. Also, the unemployment rate currently stands at 3.5%, whereas the wages are upsurging, which might push the businesses to increase prices (Amadeo, 2020).
Earnings growth losing thrust
Earnings pose as the leading risk for stocks in 2020. Many firms are reviewing their earnings forecasting and are revising them lower, a drift that does not support the lofty anticipations that rising stocks have set (Wahl, 2020).
The Fed cuts have permitted investors to shift their focus on earnings; from this incident, we can see that the US equity market has become entirely disconnected from underlying profitability. The firm’s earnings position is flat and that the stock market feels toppy (Lewis, 2020).
Firms are expected to demonstrate earnings growth to justify their stock values. Currently, growth stocks from tech giants such as Google and Amazon have already driven the bull market.
Summary and conclusion
Economic growth in the USA has slowed due to the increased hostility with the Middle East, failure to solve significant concerns with huge trade partners such as China, and the looming aggressive elections. An increase in oil prices affects the production of other commodities, which in turn increases inflation rates.
Uncertainty surrounding the economic policies, especially Fed cuts, has created a depressing investment in the business environment. Activity in the industrial side seems to be weak; the unemployment rate remains at 3.5% while wages are increasing. A depressed economy is characterized by increased inflation and instability in the stock market.