NEW YORK — Unemployment is near lows not seen in half a century. The American economy is set for its best year since 2005. Large corporations are producing giant profits. Even wages are starting to rise.
And the stock markets are a mess.
The losses extended on Tuesday, as the S&P 500 turned negative for the year, stoking fears that one of the longest bull markets in history could be at risk.
The stock market struggles may seem incongruous with an American economy that by many measures looks strong. But stocks often act as an early warning system, picking up subtle changes before they appear in the economic data.
In recent weeks, retail stocks have been hit over concerns of rising costs, a sign that the trade war may be starting to take a toll and that higher wages are cutting into profits. Commodities and the companies that depend on them have been pummeled by the prospect of weaker demand should the global economy slow. Five tech giants — Facebook, Amazon, Alphabet, Apple and Netflix — have shed more than $800 billion in market value since the end of August, the fallout from slowing growth and regulatory scrutiny.
The S&P 500 closed on Tuesday at 2,642, down 1.8 percent. Other markets also flashed warnings, with oil dropping by 6.8 percent, falling deeper into bear territory.
The sell-off doesn’t mean the United States is headed into a recession. The stock market suffered several sharp stumbles in recent years before climbing to new highs on the back of booming corporate profits and strong economic growth.
But the recent market drop is consistent with a potential downshift in the American economy. In 2018, a hefty dose of fiscal stimulus allowed the United States to shake off the growth worries in China, Europe, and the rest of the world. It won’t have the same potency next year, leaving the US economy vulnerable to a global slowdown.
“I think there’s very clear signs that investors are beginning to worry about weaker growth in the coming year or so, and how that’s going to feed through to corporate earnings,” said Michael Pearce, senior US economist with Capital Economics.
Until recently, investors were willing to ignore the geopolitical dramas, economic risks, and other issues clouding the outlook for US companies. Now, they are jittery, pressing sell at even small signs of trouble.
Strong growth and deep corporate tax cuts have supercharged corporate profits this year. Once all the results are tallied up, the third-quarter earnings for companies in the S&P 500 are expected to be up more than 28 percent from a year earlier — outpacing previous quarters.
But those numbers haven’t satisfied investors, who have grown simultaneously concerned about risks they face if the economy stays strong — such as rising interest rates and increased expenses for wages — as well as the threat to stocks from a significant global slowdown.
On Tuesday, shares of the retailer Target dropped by more than 10 percent, on worries that rising costs — from increased wages to higher prices for the Chinese goods facing tariffs — could continue to crimp profits. Investors also dumped shares of Kohl’s and TJX, the owner of T.J. Maxx, which both saw freight costs eat into earnings.
Apple continued its slide on worries about softening demand. The tech giant tumbled nearly 5 percent, after Goldman Sachs equity analysts cut their price target, citing deteriorating demand, especially in China.
‘I think there’s very clear signs that investors are beginning to worry about weaker growth in the coming year or so.’
China, the world’s largest consumer of oil, has also been weighing on commodities. Oil prices, now just above $53 a barrel, have fallen more than 20 percent since early October. On Tuesday, the energy sector of the S&P 500 was the worst performing part of the stock market.
Weakness in China is feeding broader global concerns. Last quarter, the country’s growth slowed to its lowest level since 2009, during the depths of the global financial crisis.
Japan is also looking shaky, with the economy contracting in the third quarter. And Germany, the powerhouse behind Europe, shrank unexpectedly during the third quarter as well.
The global slowdown could eventually spill over into the United States, particularly as the impact of this year’s tax cuts fades in 2019. For investors, that could mean a choppy new phase in the markets after years of solid gains.
“I think this is what a low-return environment starts to feel like,” said Joe Davis, chief economist with Vanguard. “The past five years, although entirely welcome from an investment standpoint, is clearly unsustainable.”