Despite strong growth and a fall in unemployment in the U.S., a mercurial stock market may herald a potential downshift in the economy. The recent market selloff is widely considered to be caused by investors' worries about rising interest rates, slowing economic growth and the trade dispute with China.

Investors' biggest concern is that Trump's economic policies fail to achieve their goals, said Li Shanquan, Senior Vice President and a portfolio manager of Oppenheimer Funds, at the annual Mingde Forum held in New York on November 4. The forum, organized by the North America Alumni Association of the Renmin University of China, gathered a dozen Wall Street investment managers to discuss the macroeconomic outlook and investment strategies.

To get manufacturing jobs back and "make America great again", the Trump administration has implemented a series of moves, including introducing tariffs with its trading partners, but Trump's policies ignore the laws of economics and nature, said Li. Any action against the laws of economics and nature will fall short of its targets, he said. Due to the time lag of policy effect, next year will be the time to test the effect of Trump's policies, said Li.

Meanwhile, the competitive edges the U.S. has long boasted are now being overshadowed by potential risks to its economy, added Li.

Trump's tax reduction plan is meant to boost economic growth. However, if tax cuts don't continue to stimulate the economy, things will not end well, Li warned. He added that the U.S. has accumulated more than $21.5 trillion in debt, equaling to 106 percent of its GDP.

U.S. debt has been increasing over the past two years. If the trend continues, debt levels will reach a tipping point, said Li.

A widening budget deficit fueled by tax cuts and government spending has been pushing up the U.S. debt level. The Treasury Department announced on November 13 that the U.S. budget deficit in October expanded by 60 percent year on year to $100.5 billion. The deficit for Trump's first full fiscal year—that ended on September 30, reached $779 billion, the highest level since 2012. It's widely expected that the deficit may exceed $1 trillion in the 2019 fiscal year.

Former Federal Reserve Chairman Alan Greenspan also warned that rising U.S. debt level could undermine its economic expansion in a recent interview with Bloomberg TV.

With the U.S. Federal Reserve set to raise interest rates, even with a rate hike of 1 percentage point, the increased interest payment of the $21.5-trillion-dollar debt will eclipse the yearly value of GDP growth, Li said.

Ning Michael Zhu, chief investment officer of Phase Capital, said at the forum that there may be four rate hikes by the Fed next year.

If the 10-year bond yields, which were 3.06 percent as of September, reach 3.5 percent, default ratio of junk bonds, or high-yield corporate bonds, will rise. If the default ratio of junk bonds exceeds 3 percent, this round of bull market will come to an end, said Zhu.

Copyedited by Craig Crowther

Comments to yushujun@bjreview.com