After hitting record highs just a few months ago, stocks dropped off seriously in August and September. Despite fighting higher recently, they have yet to make back the losses.
According to a note from Credit Suisse there are 5 reasons they are being held back. They’re a wide range of reasons, with sources from the markets themselves to the US economy to foreign concerns.
- China and China’s real estate market. Credit Suisse says that the slowdown in real estate is troubling considering it accounts for 15% of GDP and around half of household wealth. While the company thinks that the real estate prices are stabilizing, they are bearish on the market overall due to the over-building and over-valuation.
- Wage growth and what it might encourage the Fed to do. The most immediate concern is that higher wages will bring down corporate margins and ultimately corporate profits. The further concern is that once wage growth shows up, it will look like inflation, and the Fed will raise rates. “We worry that if the Fed raises rates, then the gap between the Fed dot chart and the forward curve might end up closing if the rhetoric is not unambiguously dovish,” said the note. “Thus the risk of a policy mistake by the Fed would be high.”
- Widening of high yield spreads. Spiking borrowing costs for speculative-grade companies is precondition of a bear market. Though it can be a false indicator, it has the market spooked. “High yield spreads ex energy have risen c200bp from their lows,” said the note. “High yield is critical as c80% of US corporate financing is from the corporate bonds market, the spread between corporates and the free cash flow yield has supported net corporate buying (and hence equities) and as the lower interest charge has accounted for a third of margin improvement (and that would become a drag if the investment yield rose 100bp).”
- Disruption. The note says that there is “barely a sector or theme that is not being disrupted sector or theme that is not being disrupted.” The analysts cite examples like Airbnb and the hotel industry. These disruptors are worrying investors and will challenge the stock prices for the companies that face these sorts of disruptions.
- Low oil prices. The price of oil is connected to a number of market elements including equities, said Credit Suisse. So the low price of oil is depressing other assets. “If the oil price falls, inflation expectations tend to fall, credit spreads widen and cyclicals tend to underperform,” said the note.
Credit Suisse didn’t say whether these factors are transitory or how long they could linger, but for now they seem to be holding the market back.
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