Traders and investors are currently in an overhand mood because of the various development in the global economy. The US economy has taken a big hit as a result of the trade war between the country and China. However, the stock market is flirting with its all-time high record. S&P 500 and Dow Jones are having their best June since 1938. The US economy is on the verge of recession but the stock market is on a continuous rise. What is the possible reason for this anomalous rally in the stock market?
Well, the rally which is pertaining in the stock market currently does not reflect the reality of the US economy. The risk of a global recession is increasing day by day as the tension between the superpowers is increasing. It is a common observation that the stock markets crash when a recession happens. This is evident from what happened in 2008. The market indices across the world were down more than 50% in a single year. But why is the market not reacting to this risk of global recession?
Is the Rally Pre-Mature?
The current rally in the market is not because of the economic situations but because of the hope that the federal reserve will cut rates. The federal reserve monetary policy has changed their stands this month which indicates that we are soon going to see one or two rate cuts. Last year, the federal reserve committee had raised the interest rate 4 times from 1.5% to 2.25%. The interest rate has been on a constant rise since the crisis of 2008. The market doesn’t like rate hikes.
In 2018, the federal reserve monetary committee made it quite clear that there will be further rate hikes in 2019. However, the monetary committee policy review which came in 2019 showed that the federal reserve has changed their stands and has predicted no rate hikes in this year. Goldman Sachs, an investment firm has predicted that the federal reserve will cut the interest rates two times this year. This means that we can see a 0.25% cut two times in 2019 itself.
This rate cut will be in response to the slow Down which the US economy has been facing since the escalation of the trade war. The various industrial indices have been lagging behind because of the poor growth rate. We have also seen President Donald Trump tweeting and urging the federal reserve to cut interest rates. According to Donald Trump, the United States will be a beneficiary of the trade war if the interest rates are cut.
Hence, it is quite evident that the market is factoring in a 0.5% rate cut. No wonder, we have a singularity in the market since the very beginning of this year. There is no sign of major weakness in any index. The traders and investors are betting on the rate cut hopes which shall revive the US economy. There are some major global events which are coming up this weekend it and the markets have an eye on them. The G20 summit being held in Japan is the most important event which the entire world is going to track.
The outcome of the trade war is going to be finalized within the next two days. There will there be a trade deal between the United States and China or there will be a full-scale trade war. Hence, there can be high volatility in the market in the next week. However, the market has been solely betting on the hope that the federal reserve monetary policy will cut the interest rate by 0.5% in 2019. The rally in the market is not premature and will further strengthen if a trade deal is signed between the two countries.