How To Know What To Worry About

How To Know What To Worry About

over 3 years ago3 mins

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Having highlighted some of the brighter spots in the global economy last week, I’m taking off the rose-tinted glasses today and focusing in on some decidedly bleaker data points from around the planet. When it comes to investment, balance is important – so consider this Insight a gloomier companion counterpoint to last week’s bullish bulletin.

What does this mean?

Let’s begin by addressing the elephant in the room: it’s hard to imagine global economic growth truly taking off while the coronavirus pandemic continues apace. Here’s what the global case rate looks like. There are, of course, several ways to interpret this data – and testing is much more prevalent now than in the spring – but it’s still a scary chart for many.

Global coronavirus cases
(Source: Google, Wikipedia)

Diving into different regions, you can’t help but conclude that Europe is suffering more than most. Take the local Purchasing Managers Index (PMI), a survey of business sentiment that serves as a key forward-looking economic indicator. The PMI for the eurozone services sector – which makes up three quarters of the bloc’s collective economy – has been stuck below 50 for the past two months, signifying the sector is shrinking. That’s particularly painful when placed alongside the large Asian economies of China and India.

Diverging economic confidence in Europe and Asia
(Source: Wall Street Journal, IHS Markit)

No wonder economists predict that the eurozone economy will shrink nearly 8% this year – while the UK’s economy is expected to end up 10% smaller than it was on New Year’s Day 😧

Forecasts for European economic contraction

European consumer confidence is also weak. Car sales in Germany, France, Italy, and Spain all declined last month after briefly perking up over the summer. It’s hard not to conclude that the path back to normality here will be long and lumpy.

European car sales are declining
(Source: Bloomberg, ACEA)

Looking further west, America’s juggernaut economy also appears to be running out of steam after Congress failed to pass any extra stimulus measures in the run-up to last week’s election. A closely watched employment gauge dropped back down in October as the positive summer vibes faded.

US ADP jobless claims data

A lack of business confidence is showing up in US trade data too, with both imports and exports weak in September, the most recent month for which figures are available. As consultancy Oxford Economics puts it: “Travel restrictions and virus fears continued to crush services, while goods trade rose moderately. With the global recovery at risk from rising virus cases, trade is set to remain subdued in coming months.”

Why should I care?

Until consumers and businesses are convinced coronavirus is under control – or at least reduced to a manageable day-to-day risk – it isn’t easy to envisage market sentiment taking off in any meaningful way, particularly in Europe. 

While stock markets seem healthy enough for now, there are some worrying signals beneath the surface. Recent gains have been propped up by an increasingly narrow bunch of companies – particularly tech giants like Facebook and Amazon. The last time so many stocks were falling while the overall market rose – in the late 90s and early 70s – it heralded big selloffs ahead.

Stock market breadth indicator
(Source: Man Group)

Be careful out there, folks.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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