Markets got high on synchronized growth, but the buzz is fading and an urgent question is taking its place: Will they get another fix?
The omens aren’t great. A slew of barometers, from stock prices and raw materials to computer-chip makers, are now signaling that expansion in major economies is decelerating in concert. In some cases these bellwethers are even overshooting recent weak data, raising the possibility that economic indicators are poised to get worse.
“The market has proven to be a very effective forecaster,” Nomura Holding’s London-based strategists Kevin Gaynor and Sam Bonney wrote in a Nov. 9 note. “Upfront we would expect further moderation in growth data over the next few months.”
Such a development threatens to further undercut equities and credit, already battered by trade wars, valuation fears and rising rates.
Goldman Sachs Group Inc. strategists are telling clients to be ready for “a sustained period of low returns” and slower expansion. The central macro scenario of Amundi Asset Management, one of Europe’s biggest money managers, is a “multi-speed slowdown” that risks becoming synchronized. The firm says the year will end with a disjointed global economy and increased downside risks.
Industrial Revolution
For Goldman, the slowdown can be seen in the relationship between stocks and purchasing managers indexes. The two are correlated, and equities have tracked PMIs as they show a drop in global industrial demand.
“Everything in the global industrial economy peaked at the start of the year, and it seems that the weakening trend will continue into next year,” said Colin Hamilton, managing director for commodities research at BMO Capital Markets Ltd.. “If you take strong global industrial output out of the picture, then that leaves so much more slack for consumers to pick up.”
Nomura recommends investors reduce exposure to equities and credit and increase defensive holdings in government bonds and cash, based on a proprietary trading model that points to a slowdown in growth.
Stocks “well above sustainable long-run averages” on earnings-per-share and growth metrics are likely to be revised downward during the next quarter, according to Gaynor and Bonney.