Monetary authorities across the world have slashed interest rates 80 times over the last 12 months and printed upwards of $1 trillion over four months to counter the economic slowdown that is plaguing especially the developed world. As we have mentioned in this post, the Federal Reserve has been purchasing assets and stacking them on to the balance sheet at a pace we haven’t seen since the 2008 disaster. Judging from the lackluster response of economic numbers from around the world, it seems that the only response to this flood of “liquidity” being provided by the major central banks is a stock market rocket launch to new all-time highs.
Data from Netherlands Bureau for Economic Policy Analysis (CPB) showed Friday that global trade volume continued to contract in November, marking one of the most extended stretches of negative growth since the end of the financial crisis.
November was the sixth month of straight of declines on a Y/Y basis, the longest stretch since right after the 2008 financial crisis. World trade has dropped sharply – down 3.4% from November 2018.
However, there was some good news- the rate of contraction has slowed from a -2% pace seen in October, which was the quickest rate of decline since a decade ago.
And while hope is high that the so-called ‘trade deal’ will lift all boats, data shows that the global economy has continued slowing into 2020 as the Baltic Exchange’s main sea freight index has crashed 70% in the last four months, the biggest down moves since 2008. Although this may partly be simply the front-running of tariffs expiring, but it is concerning, nonetheless.
Additionally, earlier this week, the IMF downgraded its forecast for global GDP for 2020 and 2021, its sixth straight reduction, although in a sliver of optimism, global GDP in 2020 is now expected to post a modest rebound from 2.9% to 3.3%, (down from 3.4% in October) and to 3.4% in 2021 (down from 3.6%) as the IMF said, “there are now tentative signs that global growth may be stabilizing, though at subdued levels.”
With so much of the empirical data coming out across the globe being negative, now we have the outbreak of the coronavirus that could derail investor confidence and consumer spending especially in Asia. Of course, the history of these type of epidemics has proven to be buying points historically. Courtesy of Charles Schwab Investments here is a look at the MSCI international stock index with some of the virus or flu epidemics over the last 20 years…
Of course, time will tell how serious this epidemic becomes, but keep in mind that the world’s stock markets have had a remarkable run over the last couple months with next to no volatility. A short-term pullback is a near certainty – if things get more serious from there we will have to wait and see. By some measures (S&P 500 price/sales ratio for example) the stock market is at all-time valuations. No one knows if this bull run has another leg in it in 2020 or not, but we expect volatility to be on the rise regardless.
Regards and good investing!
Greyson Geiler