Market Commentary: 4 Bearish Forces Loom LARGE

We’re not out of the woods yet. Large macroeconomic forces loom that could derail the US stock market beyond its recent correction, and China ranks among the top of them.

Key Points

• The US stock market may be on fragile foundations now as macroeconomic threats loom large, including those from China and Japan.
• A further risk stems from the resumption of student loan payments after the moratorium on student loan debt was lifted.
• High inflation and interest rates further threaten consumer demand.

The China Risk

China is the world’s second largest economy and a major trading partner of the United States.

If China’s economy slows down, as has been touted recently, or enters a recession, it could have a negative impact on the US economy as a result of:

• Lower demand for US exports.
• Increased volatility in global financial markets.
• Increased political instability in the region.

The Japanese Risk

A further risk stems from Yen intervention, which threatens the US stock market because of:

• Lower demand for US exports: A weaker yen would make Japanese exports cheaper, which could lead to lower demand for US exports. This would hurt US companies that sell goods and services to Japan, and could lead to job losses in the US.
• Outflow of capital from the US stock market: It would make it more attractive for foreign investors to buy Japanese assets, such as stocks and bonds, triggering an outflow of capital from the US stock market, which could drive down stock prices.
• Increased uncertainty in global financial markets: A yen intervention by the BOJ could be seen as a sign that the Japanese government is worried about the strength of the yen and the impact it is having on the Japanese economy. This could lead to increased uncertainty in global financial markets, which could also hurt the US stock market.

Student Loan Payments

The resumption of student loan payments could have a negative impact on the US stock market in a number of ways.

• Decrease in consumer spending: When borrowers have less money to spend on other things, it can lead to a decline in demand for goods and services, which could hurt businesses and the overall economy, and in turn the stock market.
• Increase in defaults: If borrowers are unable to afford their student loan payments, they may default on their loans, leading to financial problems for borrowers, as well as for banks and other lenders.
• Increase in interest rates: As the demand for student loans increases, so will the interest rates on these loans. This can make it more expensive for students to borrow money to attend college, which can lead to a decrease in enrollment, which creates a domino effect by decreasing the demand for products and services related to higher education.

Consumer Demand

Two massive forces threaten consumer demand, which makes up the bulk of the US economy. As consumer demand falls, so goes the economy, and the market too.

• High inflation: When inflation is high, it can eat away at consumers’ purchasing power, making them less likely to spend money on discretionary items, thereby hurting business sales.
• Rising interest rates: Rising interest rates can make it more expensive for consumers to borrow money and make them less likely to spend it.