Will A Global Recession Cause U.S. Stocks To Slump?

As the markets brace themselves to launch into the third quarter of 2016 with expected declines, analysts are predicting the lower corporate endings downward trend pattern to repeat. 

This is the fifth quarter in a row to show a year-over-year climb down that is mirroring market forecasts.

The S&P 500 is expected to report profits of -5.2% which point to a definite encroaching lessening in the margin of earnings. 

This reliable stock market index for the US bases its calculations on the capitalizations in the market of the top 500 US companies that have stock listed on the country’s exchanges.

This trend is following the pattern that the markets displayed in the blackened climate that prevailed in the recession years of mid-2008 and mid-2009.

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Take a look at the graphs below.

The first graph is from 2008, and the second shows the current trends in 2016.

They are indicating the same patterns of behavior:  

• Two market areas that lead concerns will follow.
• Markets with significant impact, like the Chinese SSE (Shanghai Stock Exchange), are also displaying stress patterns and the government of the People’s Republic of China are attempting to quiet the voices that are currently expressing concerns. This is in the country’s best interests as a calm market environment has always been of importance in this burgeoning new economy.
• The ricochets still being felt in Europe, after the shock leave vote that was registered in Britain that opted out of the European Union has raised some voices of concern regarding the continued viability of the European markets.
• The Brexit vote brought to attention the continued importance of Europe having to show strength when compared to other more stable economy options. The precipitous drop in the pound sterling has stabilized, but it seems that the markets are still watching events with a cautious eye.

These factors continue to raise alarm bells as the global events around the world may be seen to have a knock-on domino effect regarding optimism felt in the US markets. 

This will culminate in a possible market correction.

History Repeating Itself

Since the massive market drop that occurred in 2008, investors in equities are today facing a lackluster market. 

This brings with it the possibility of stock prices being projected down. 

Action in other investment arenas are showing little movement too.

Fixed-income and bond yields are currently low, and other options are showing the same behavior.

Corporate profits and earnings have been struggling for a considerable length of time. 

The Federal Bank’s continued low rates have escalated asset prices to a level where they are no longer thought tenable.

Analysts now have to take into their forecasts two possible market trajectories:

• Whether a down swing will be a genuine correction that will allow the Federal Bank a chance to adjust its rates or:
• Will a more severe panic lead to long term serious implications?

Paying Off The Chinese Debt & Minimum Salary Increases

The US domestic economy is currently overburdened with the massive loans outstanding to China. 

It has also experienced an increase salary crawl. 

This has caused the need for corporate America to look overseas to stimulate revenue.

The graph below displays the decline in the purchasing power of the average American salary.  

Over 30% of the revenue taken by corporations listed on the S&P 500 have obtained it in the overseas markets. 

Taking away this active stream of income, it will be uncertain that the corporations will still experience the growth needed to continue projecting vibrant profits.

The less definite causative factors may be the Chinese markets predilection to maintain the devaluation of its currency to stimulate its export desirability. 

Europe seems set to experience a period of inaction while it licks its Brexit wounds and gingerly tests the waters.

All of these signs point towards correction. 

This is not a current certainty, however, as an industry strategy paper lately commented that a drawdown is not predicted shortly. 

It is other where indicated, though, that earnings expected in the future are not such as will support the stock prices listed in the US.

It is not likely that investors will go quietly into the night and ignore the results that show revenue falling in the teeth of earnings growth forever.