This was the title of Bloomberg’s “Weekend Reading” post, which captures and caters to the angst in the market place about the global economy and fear of the “R” word. I mean “walking the tightrope” did get my attention, so much so I used it for my title as I was attempting to gain your attention. Bad News sells. The main difference in my post is that I’m trying to get your attention to provide a useful perspective and counterpoint to the negatives cited below.
“A precarious global economic outlook has policy makers walking a tightrope. In China, growth was at its slowest pace in two decades. So, what’s the chance the U.S. falls into a recession in the next 12 months? The Bloomberg Recession Tracker has the answer. Meanwhile, there’s better news for America’s green economy. As for the U.K. economy, there may be news this weekend. Or maybe not.”
What about China?
U.S. market participants have been worried about China’s economy for much longer than I have been posting on kortsessios.com (7 years in February 2020). On June 25, 2013, some were suggesting that a Chinese banking crisis was about to provide our market with another “Lehman Moment” a la 2008 … “The People’s Bank of China Speaks.”
What did the bank say? “PBOC Says It Will Ensure Stability of China Money Market.” Voila! … crisis ended.
In a previous post I had provided a link to a Barron’s article “Where Will it End?”
This first article began giving us reasons as to why we should not be worried. Though Chinese GDP growth was slowing (as a result of concerted government policy), it was still running at 7.7% in the 1st quarter (2013), and Chinese sovereign debt to GDP was only 30% vs. 100+ % for the U.S. They had room to maneuver. However, the main body of this article was very negative.
“I would say that China is now roughly at the stage [of indiscriminate credit growth] the U.S. was in March 2008, when Bear Stearns had to be rescued and the subprime market was unraveling,” says David Cui, Bank of America Merrill Lynch China strategist, working out of Shanghai. “What will tip the scale will likely be a major event in China similar to Lehman’s bankruptcy six months after the fall of Bear Stearns, which will be some bailout of a major player that Beijing will do everything it can to disguise so as not to shake confidence.”
Remember, this article was penned in 2013. Are you scared now? were you scarred then?
The piece ends comparing China to Japan as that country moved into its prolonged of decline and stagnation. .
Where was our market during this 2013 mini-crisis?
The S&P 500 had just broken out of a 13-year trading range … breaking out above its March 2000 previous all-time high of 1550. It closed June 2013 at 1609.78. The rest is history and continued media negative hysterics.
Fast forward to October 18, 2019
Chinese GDP growth was just reported in at the lowest level in more than two decades, 6%. Oh horrors! The Chinese were trying to slow their economy down seven years ago (remember it was 7.7% way back in ’13). China is the second largest economy in the world ($14.2 trillion est. 2019 GDP) and its growing 3 times faster than the US. This is certainly NOT the glide path of a brick as some feared back in 2013 … especially when you take into account the effects of the current US/Chinese trade skirmish. BTW, in light of all the negativity evidenced in our headline and lead referenced story, we closed Friday October 18, with the S&P at 2986 (down just 1.37% from its record high of 3027).
What really seems to be moving the markets?
It does not seem to be the impeachment and removal from office of Donald J. Trump. The revelations on that front seem to be getting more damning every day. Nor does it seem to be the rise of Elizabeth Warren in the polls. What really seems to move markets these days are positive and negative developments in US/China trade relations and the fear among investors that deterioration on the trade front might bring the world into recession (the dreaded “R” word).
The president has one ace in the hole, the economy and its barometer, the stock market.
I hate making predictions. Regardless, I believe that we are due for a major positive announcement on trade (whether substantive or not). It will proclaim a positive face-saving agreement for both sides that will defuse the trade issue … push it way to the back burner. It will remove trade-generated recession concerns for business and prime the market for new highs. My thesis is that the economy has to be humming on election day 2020 for the president to have any chance of re-election. Assuming he makes it that long, he will do everything in his power to make that happen.
What about Democratic Politics?
As I have said before, whoever the Democrats run at the head of their ticket, regardless of how seemingly radical they might be, any change will come slowly and it will be governed by the fact the the majority of people in the United States line up near the center of the political spectrum. We will be governed from the middle. BUT, MAKE NO MISTAKE, THE MARKET WILL TRADE ON THE HEADLINES WHOMEVER THAT CANDIDATE MIGHT BE. Remember the rhetoric surrounding Barack Obama’s ascension to the oval office. Dire consequences were forecast while the S&P more than tripled during his time in office. Also, you might try to remember who gave you those dire forecasts
In this era of continuing negative concerns …
I leave you with these paraphrased words of wisdom from Samuel Langhorne Clemons:
‘I’m an old man and I have had many problems in my life, none of which have been real.‘
Stay the course!
The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities. I may, from time to time, mention certain securities for illustrative purpose, names where I personally hold positions. These are not meant to be construed as recommendations to BUY or SELL. All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.