Global Growth: What Goes Around Comes Around
I can only speak to my own experience, but having worked in dealing rooms in London, Tokyo, Moscow and Warsaw, there are certain things that seem to me to be common to that environment wherever you are in the world.
One of those things is an abundance of phrases and sayings that are repeated often enough to become clichés, then repeated even more until they pass the point of being annoying and become mildly amusing again. In most cases, those sayings are specifically about trading and traders, but some have broader relevance.
One of those, “What goes around, comes around,” is particularly apt this morning.
It is a common enough phrase outside dealing rooms, but in a market sense it is generally used to refer to the luck that is an inherent part of trading, or to the tendency of individual securities to return to the mean over time. In this case though, it is a good way of describing the way that global economic growth tends to drive markets higher over time, even if it is uneven in the short-term and in any given country.
For a while now, a strong U.S. economy has been the driver of stocks around the world, providing a bulwark against slowing growth in China and actual declines in GDP in Europe. This morning, after a couple of weeks when trade worries and a general sense that valuations may be stretched that has caused the major U.S. indices to retreat from their highs, even the economic data turned sour, with an unexpected drop in retail sales.
Ironically enough, what good news there is this morning is coming from the two countries that until now have been the problem, Germany and China.
German GDP, after flirting with a full on recession at the end of last year, turned positive again for Q1 with a 0.4% increase from last quarter. That translates to a 0.7% year on year increase. Of course, one swallow doth not a summer make, but this does suggest that the stimulative measures taken by the ECB are having the desired effect. Absent any major external shock, that in turn would mean that further growth can reasonably be expected.
From China, there was good news and bad news, but it can easily be argued that the overall effect is a positive. The bad news was a big drop in industrial production. The good was a blowout earnings report from Alibaba (BABA), beating on the top and bottom lines. Normally, bad news about the broader economy in any country would easily outweigh good news about one company, but in this case this that may not be true.
The worries about China have been mainly about the negative effects of the trade war with America, but these two data sets taken together may suggest that those effects may not be as bad as feared. The decline in manufacturing was a bit worse than expected, but expected nonetheless and had therefore been largely priced in to global stock markets. Alibaba’s results, however, suggest that the Chinese economy may be transitioning away from manufacturing faster than previously thought. That could well lessen the damage from tariffs, which are focused on manufactured products.
So, what goes around, comes around. There are signs that the strong growth that has driven U.S. stocks higher may be slowing, but at the same time there are indications that Europe is turning around and that China may not be hit as hard by tariffs as thought. If all of those things are true, it will not stop U.S. markets from falling further in the short term, but it does mean that buying into those declines would be a smart move.