There has been a lot going on in markets this year. Q2 corporate earnings were up 24% year-over-year on average and stock buybacks were up over 50%. Economic growth as a measure of GDP was up 4.1%, the highest in recent years. Despite these positive trends, investors should watch out for some potential headwind.
- Trade war, especially in China could escalate even further. We have already started seeing total U.S. exports slowing down likely due to a stronger U.S. dollar and unease with recent trade rhetoric. The dollar value of goods affected by tariffs could rise to levels that could eventually prove a recession is underway.
- Economic growth is set to slow down as Q3 is unlikely to keep pace with the robust Q2 performance. In the past month, readings on the service sector, manufacturing, housing statistics, auto sales and payroll growth have all disappointed. A dip in oil prices could also be another indicator of a slowing economy.
- Total U.S. Treasury and U.S. Debt issuance is soaring. The annual deficits are expanding at a rate where total U.S. debt to GDP could breach 100% by 2020. In the meantime, government revenues are down due to tax cuts. If the debt forecasts worsen, the Federal Reserve could increase interest rates causing a hit to the U.S. equity market.
While the economy has shown investors positive signs this year, investors should be smarter with their investment as potential risks may be looming ahead. One way to hedge these risks could be through diversifying portfolios against stock market swings. Perhaps, reevaluating overweight growth stocks could also be beneficial against unexpected market surprises.