Note that due to read requests, I've decided to break up my weekly portfolio updates in three parts: comment, financial update, urlister / best shares to buy now. This is to avoid excessive long articles and maximize the tool for my readers.
Note that I'm providing these weekly economic updates purely because I think investors should always take a comprehensive "big image view" of the world. It means knowing the state of the economy and what the probable risk for the short and medium term is. However, as I will explain later in this article (recession section), macroeconomic analysis has historically proven to be a terrible tool for stock market timing (SPY) (DIA) (QQQ). Therefore, I only offer these analyzes so readers will probably see a recession that comes around a year or so away.
It will hopefully give you time to prepare yourself emotionally and economically for the decline. It will also hopefully allow you to adjust the portfolio's capital allocation to a more defensive attitude, for example with defense sectors, or potentially larger allocation to bonds (for lower risk-tolerant investors).
Increasing global setback risk …  On Friday, the market was again shocked by concerns about slowing global growth, this time from China. It sent shares down to a new correction low, 11.3% from their September 20 record high.
According to recent economic data, retail sales in China grew at the slightest pace since 2003. At the same time, industrial production increased at the slowest rate of almost three years, suggesting that trade war with the United States is starting to bite. In fact, China's production sector is now entering into a contract, and its weakest since June 2016.
(Source: Bloomberg) – Over 50 Indicates Growth
At the same time, news from Europe is also bad. According to Reuters, the EU is growing at the slowest pace for over four years as a new order growth, but dried up, damaged by trade tensions and violent protests in France. "
And in Germany, Europe's economic growth engine, GDP growth in Q3 shrank by 0.2% QoQ, but was still up 1.1% YoY. This is the first negative quarter in the quarter since 2015.
"The weak decline in GDP compared to the previous quarter was mainly due to developments in foreign trade: preliminary estimates show that there were fewer exports, but more imports in the third quarter than in others. "- Destatis Office
At the same time, Brexit continues to be a hot mess, with British racing coming up with some sort of trade agreement before it officially leaves the EU on March 29.
Japan continues to struggle with spell of a recession After QoQ GDP fell in Q1, the country reported only -1.2% QoQ growth in Q3. It was already below bearish expectations of -1.0% growth.
And with US economic growth forecasts now falling steadily and the IMF downgrades its forecast for global growth next year, many investors are worried that a global trade war can tear the world into a recession. But the good news is that while global growth is actually falling, fear of a global recession is largely feared overblown.
… Is Very Overblown
Firstly, it should be pointed out that the very highest risks we are concerned with, primarily the slow growth of the trade war, probably makes it risky self-limiting. For example, thanks to China's economic growth, which was already falling due to the government's attempt to weigh it out of excessive dependency on debt, and a workforce that has declined since 2014 (because of the one-child policy that is now suspended but too late to help) China make strong overtures in trade negotiations, including announcing plans to:
- postpone higher tariffs of $ 126 billion in US imports scheduled to come into force on 1 January
- buy as much as 3 million tons of US corn as early as January 19659019 Reduction of tariffs on US cars from 40% to 15% (a retaliatory tariff imposed in July)
Now it is important to realize that due to the complexity of these negotiations, which imply many important trading policies that must taken up (for example, Chinese IP theft), it is unlikely that we will get a trade agreement by March 1 (today's deadline). Rather, economists believe that stable progress will only cause the US and China to expand their "ceasefire" on new tariffs.
Current tariffs will remain in place (unless the United States reimburses at any of its fixed rates) and an actual final trade agreement is likely to take six to 12 months. USA / Canada / Mexico NAFTA negotiations took 15 months to complete and there was much less enmity between America and these trading partners.
The good news is that President Trump now listens to nothing but his intestine on trade policy. While short-term stock prices are actually a terrible economic indicator, the market is fearing that has tapped us into the second correction of the year, also that Trump is likely to remain on the negotiating table. It is especially true now that solid progress has been made and he feels increasing pressure from the one thing he cares for other than gut instincts.
What about the other weak global economic growth data? Well, Japan's economic weakness is also not as bad as it seems. According to Takashi Miwa, a research analyst at Nomura:
"A breakdown by demand category shows a 0.1% qq drop in real spending and 1.8% for real exports, with such factors working to push down real GDP We believe that this turn to negative GDP growth is a temporary downturn caused by natural disasters. In fact, monthly indicators published since October show a recovery in real exports and real spending, which had also shrunk qq in July- September. "
At the same time, the growth rate of global production, while gradually slowing from the end of 2017, seems to be bottoming at a level that makes a global setback unlikely.
(Source: Bloomberg) – Over 50 Indicates Positive Growth
How about slowing global growth forecasts? Well, slower growth is not the same as negative growth. The IMF estimates that the world economy will grow 3.7% next year, down from 3.9% this year.
(Source: Forexlive) – November estimates
The OECD also expects slower but solid growth ahead, including in all major economies.
The point is that when you see scary headlines in the financial media, you realize that these serve two main goals. They are meant to explain short-term market volatility (basically a guess why stocks fall on a given day). But more importantly, they are designed to maximize pageviews and ad revenue. They are NOT generated with your best interest in mind. All investment decisions must be made with a long-term focus, taking into account your personal risk tolerances, long-term plans and what resource allocation best suits your financial goals.
Current economic growth
- Q3: 3.5% (other estimate)
- Q4: About 2.4% to 2.5%
- All year 2018: 2.9% to 3.1%
- 2019: 2.4% to 2.7%
(Source: Atlanta Federal Reserve)
Each major GDP model uses slightly different combinations and weightings on leading indicators to estimate the current growth in the economy. The actual weekly figure is therefore far less important than the estimate.
Atlanta Fed's model is the most volatile I track, and is once more far bullish (3% growth) than the general economics consensus 2.5%).
(Source: New York Federal Reserve)
New York Fed's BNP Model, which tends to celebrate The conservative side is sidelined with the consensus estimate with a forecast of 2.4%. It is not only for the fourth quarter, but also for the first quarter.
Current is still the most bullish forecast, with growth of 3.5% in the quarter, but it is down from previous estimates as high as 3.9%. Personally, I tend to page with New York Bold on this and estimates that we currently grow 2.4% to 2.5%.
It would mean 2018 GDP Growth by:
- Q1: 2.2%
- Q2: 4.2%
- Q3: 3.5%
- Q4: 2.4% to 2, 5%
- All year: 2.9% to 3.1%
Although it is absolutely disappointing that US growth will slow down in 2019, I have to remind you that this was entirely expected.