Even as you keep an eye on our ever-risingstock market , it also
pays to monitor global economic trends. And looking at the economic
reports coming out of Europe and China, there is a growing cause
Slowing economic activity in these regions won't likely drag the
U.S.economy intorecession . But it could lead to
slower-than-expected growth, creating a vast disconnect between
stock valuations andcorporate profit growth.
A quick pullback
Just two months ago,
that theInternational Monetary Fund (
) saw clear reasons for optimism, predicting that China's economy
would grow more than 8% in 2013 and 2014. They even expected
beleaguered Europe to finally get off the mat later this year and
start to grow again.
Today, hopes of a European recovery are vanishing, and China is
looking a bit more tepid.
Why should you care? Because Europe accounts for 25% of
globalgross domestic product (
) and China represents another 13%.
Simplyput , nearly 40% of the global economy is on the backs of
Europe and China, so we count on these areas for export
Back in January, I relayed comments from EuropeanCentral Bank
President Mario Draghi that Europe was starting to benefit from a
"positive contagion." Indeed, economic feedback loops can prove to
be quite virtuous, and Europe might finally be on the cusp of
rising regional trade after a half-decade slump.
Trouble is, the Eurozone Purchasing Manager'sIndex (PMI) is now
pointing to a negative feedback loop. This index rose to 48.2 in
as noted here
, inching ever-closer to the 50.0 mark, which would signal an
economy that is no longer contracting.
Well, the PMI slipped to 47.9 in February and 46.5 in March. The
falling PMI signals another quarter of recession in Europe, and
recessionary economic activity leads firms to cut staff and further
reduce capital-spending plans, which sets the stage for further
Whereas theIMF predicted in January that Europe would exit the
recession this summer and generate slightly positive readings on a
full-yearbasis , the European Central Bank just issued a report
predicting a 0.5% economic contraction this year.
Despite the deepening economic morass, the
Vanguard MSCI EuropeETF (NYSE:
, which is aproxy for Europe's largest companies, has been rallying
since last June. Make no mistake, Europewill eventually prove to be
a fertile region for investors when the major economies start
growing, but it's looking less certain that we'll seen any upturn
for the next year or two.
China's head fake?
The headlines out of China are clearly not quite so dire, as
government officials predict another year of solid growth. To gauge
the market's view of Chinese economic growth, we can look
atcommodity prices, as China's insatiable appetite for commodities
means that globalspot prices directly reflect Chinese economic
Yet copper prices have stumbled in recent weeks...
...while aluminum spot prices have fallen from 96 cents a pound
in mid-February to a recent 87 cents a pound. For that matter,
lead, zinc and nickel prices are all off more than 5% in the past
30 days. The commodities market appears to imply that China's
hoped-for 8%GDP growth is at risk.
this article from Bloomberg
notes , the possible slump in commodities demand may be tied to the
fact that "China's industrial output had the weakest start to a
year since 2009." Notably, China and Europe are key trading
partners, and weakness in one region can spill over to the other.
Risks to Consider:
Economic snapshots need to be viewed over a multi-month time
frame, and the recent troubling signs out of Europe and China are
only a month or two old.
Action to Take -->
If economic statistics relating to Europe and China continue to lag
for another month or two, then look for economists to signal fresh
concern about the global economy. Also,earnings season begins in a
few weeks, providing us with a fresh read of global economic
conditions. Many expect to see a fairly solid set of quarterly
reports, yet it's the forward view that will determine the market's
next move. In an ever-rising stock market, these are the kinds
ofissues you need to be monitoring.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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