Monday Morning Minute 092418
Although domestic growth remains strong, the outlook for growth in other parts of the world has weakened.
Global Growth Weakens
Global growth is weaker than anticipated in May, said the Organization for Economic Cooperation and Development (OECD) last week in their latest Economic Outlook. Trade tensions, tightening financial conditions in emerging markets, and political risks could all further dampen the outlook according to the report.
The OECD trimmed their 2018-2019 global economic growth outlook by -0.1% to 3.7%, with rising differences across countries. While the United States remains steady, the OECD sees weaker growth throughout most of the world. Confidence has weakened, especially in emerging markets, and foreign trade and investment growth have proven slower than previously anticipated.
We agree with the OECD’s assessment. Our read of incoming data since the spring has shown that pockets of weakness have formed outside our borders. In fact, it is the foreign sub-component of our WCA Fundamental Conditions Barometer that has been weighing most on our barometer’s progress this year (chart A, below). Notably, emerging markets, which are often saddled with debt and volatile currencies, are seeing much tighter financial conditions than a year ago.
We only need to look at recent events in Turkey, Brazil, and Argentina to see just how quickly fortunes can change in emerging economies. Even China, despite its size and continued growth, is experiencing pain as their stock market falls into bear market territory. Looking ahead, a potentially disorderly Brexit looms larger for Europe, which risks seeing further erosion in confidence and growth should negotiations toward an orderly exit fail. Add to this ongoing trade negotiations between the United States and our largest trading powers, and it is easy to see why the global economy is experiencing rising angst and uncertainty.
Comparing Global Returns
The shifting global outlook can also be seen in the performance of the world’s stock markets this year. In local currencies, the United States Dow Jones Industrial Average is up 8% year-to-date, and Japan’s Nikkei is up 5%. However, the Euro Stoxx 50 is down 2% in local currency and China’s “A” Shares are down 15% measured in renminbi (chart B, below). Also, the U.S. dollar has increased 5-10% since early spring against most major global currencies. The OECD’s assessment that global growth prospects have become more disjointed seems to fit well with what markets have been telling us all year.
With growth still strong in the United States, the Federal Reserve Open Market committee meets this week and we expect Wednesday’s press conference by Federal Reserve Chairman Jerome Powell to attract considerable attention. With short-term rates still low, and domestic growth and inflation firming up, we are expecting to see a 25 basis point hike to the federal funds rate.
Kevin Caron, CFA, Senior Portfolio Manager
Chad Morganlander, Senior Portfolio Manager
Matthew Battipaglia, Portfolio Manager
Suzanne Ashley, Analyst
WCA Fundamental Conditions Barometer Description: We regularly assess changes in fundamental conditions to help guide near-term asset allocation decisions. The analysis incorporates approximately 30 forward-looking indicators in categories ranging from Credit and Capital Markets to U.S. Economic Conditions and Foreign Conditions. From each category of data, we create three diffusion-style sub-indices that measure the trends in the underlying data. Sustained improvement that is spread across a wide variety of observations will produce index readings above 50 (potentially favoring stocks), while readings below 50 would indicate potential deterioration (potentially favoring bonds). The WCA Fundamental Conditions Index combines the three underlying categories into a single summary measure. This measure can be thought of as a “barometer” for changes in fundamental conditions.
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