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Dec 12, 2018

These 5 Countries Are in Bear Markets. Is the U.S. Next?

By Mark Kolakowski Updated Dec 12, 2018


Trade tensions are weighing heavily on stock prices around the world, with equity indices in countries that are particularly dependent on exports for economic growth being especially hard hit, The Wall Street Journal reports. In the U.S., the S&P 500 Index (SPX) has endured a 10% correction since reaching an all-time record high in intraday trading on Sept. 21, and has yet to make a sustained rebound. Already, 14 major stock indices have dropped by 10% or more from their previous highs, and 6 of these, representing 5 different countries, have suffered bear market declines of 20%, as listed below.
5 Countries With Indexes Down More Than 20%

Significance for Investors

In a similar fashion to economic recessions, bear markets in stocks can spread worldwide. Thus, the fear that, in an interconnected global economic and financial system, contagion that starts abroad is likely to infect the U.S. economy and U.S. securities markets as well.
The German DAX Index, which includes 30 major companies' stocks, has been sliding since reaching a closing high in January, beset by mounting worries about trade restrictions and slowing economic growth around the world. Based on data from FactSet Research Systems, the Journal indicates that members of the DAX collectively derive 80% of their revenues from outside Germany, whereas constituents of the S&P 500 collect only 37% of their sales from beyond the borders of the U.S.
In particular, the Journal notes that the German auto industry accounts for about 7.7% of that country's GDP, and is highly vulnerable to potential trade restrictions that would limit exports or disrupt its complex worldwide supply chains. Limits to its growth inevitably will have widespread negative ramifications for the rest of the German economy. Meanwhile, in addition to his tariffs imposed on imports from China, President Trump has been threatening to impose a 25% levy on all imported vehicles and parts. This would be devastating for the German auto industry, which relies on the U.S. as a principal market.
U.S. companies and consumers also are hurting from tariffs, which are raising their costs, The Wall Street Journal reports. The total amount collected by the U.S. government on imports in October was above $5 billion, roughly double what the figure was in May. October was the first full month in which tariffs were collected on $250 billion worth of imports from China. Meanwhile, other countries are retaliating, and estimates cited by the Journal indicate that more than $1 billion in tariffs was paid on U.S. exports in October, making U.S. goods less competitive in foreign markets.
In a recent note reported on by Barron's, John Kolovos, chief technical strategist at Macro Risk Advisors, said the U.S. stock market is "moving in the wrong direction...the denial rally is over.”
According to Barron's, values ranging from the February low of 2,581 to 2,633 have been cited as critical support levels for the S&P 500 by technical analysts. If the former figure is breached to the downside, Kolovos believes that the index could be headed down to 2,400, which would be 18.4% below the all-time high reached on Sept. 21. Kolovos sees particular technical weakness among industrials, financials, semiconductors, small caps, and mid-caps.

Looking Ahead

A big question is whether U.S. stocks can avoid a bear market if China, the world's second-largest economy, and Germany, the biggest in Europe and the fourth-largest overall (Japan is third), already are in bear markets of their own. Moreover, the stock market slides in these countries are being propelled by deteriorating economic outlooks, party due to the tariff war set off by President Trump.
Declining economic fundamentals abroad, in addition to retaliatory tariffs, are dampening the prospects for U.S. exports. This, in turn, will be a negative for the U.S. economy, U.S. corporate profits, and U.S. stocks.

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