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Is the U.S. headed for a bear market?

February 11th, 2016

 

After a poor economic start to the beginning of the year, many U.S. economists are speculating that stocks will crash within the first half of the year, and the country will spiral into a recession.

 

This surprises me greatly because the end of 2015 seemed to forecast success with no end in sight. It seemed as if government officials were so confident in this ability to succeed economically that they raised the country’s interest rates. However, now it appears to me that they may have rushed this decision.

 

The Federal Open Trade Committee’s decision to raise interest rates has affected the stock market quite negatively thus far in 2016. The S &P 500 is down a significant 13 percent. The market turns from a bull market to a bear market when stocks drop by 20 percent.

 

In other words, we’re not quite there, but almost.

 

While it may seem that we are doomed, some executives offer hope. John Thain, CEO of CIT Group Inc., stated, “Low energy prices do not cause recessions. While the energy sector itself is weak, the U.S. economy is still growing.”

 

This sounds reassuring until you actually look at U.S. GDP over the last several quarters. It is indeed growing, but it is growing a decelerating pace.

 

In the words of John Kite, chairman and CEO of Kite Realty Group Trust, “There is a lot of prognostication that we’re very close to a recession, which is not tough to say when your GDP growth rate is on the margin to start with.”

 

You may be wondering why all of this is happening so fast and so out of the blue. The answer is that it’s not, necessarily.

 

While  it’s true that at the turn of the new year, the FOMC raised interest rates, one cannot simply dump all of the U.S.’s economic woes on this fact alone. It is also important to note that the rest of the world’s economy is slowing as well, and oil is cheaper than ever.

 

Oil fell to a new all-time low when it dropped below the $30 mark in January, alarming many people invested in the energy market.

 

Meanwhile, China, the world’s second largest economy, saw a sharp decline in its foreign-exchange reserves as it fell $99.5 billion dollars to $3.23 trillion. This is the smallest that China’s foreign-exchange reserve has been in the last three years.

 

It is a culmination of these factors that currently looms over the U.S.’s head. Without the proper federal initiative, it seems as though we could be headed for a recession to some extent. While the business cycle naturally expands and contracts, a recession would be more noteworthy than the mere cyclical patterns of the U.S. economy.

 

It is too soon to tell whether or not we are headed down the drain, or these warning signs are merely an economic “head-fake.”

 

I speculate the FOMC may halt or slow its plan to raise interest rates. While the raised interest rates would be good for the U.S. dollar, it may slow emerging markets which is a huge risk to take. However, turning back now may make it more difficult to proceed with raising rates in the future.

 

At this moment in time, only one thing is certain. 2016 may not be the year of the monkey after all, but the year of the bear.