The continuing emerging-market sell-off and some disappointing US economic data undermined confidence in developed markets this week. In January, the American manufacturing sector suffered the biggest drop in activity since the global financial crisis, while new orders slid dramatically.
Japan’s Nikkei is the year’s worst-performing major stock market so far, having lost 14%, while the main European indices and America’s S&P 500 are down 7% and 6% respectively.
Bond investors will feel more cheerful, however – the yield on the ten-year US Treasury bond slipped to a three-month low of 2.6%, reflecting rising prices, as nervous investors abandoned stocks for traditional safe havens.
What the commentators said
Several factors are contributing to the “global downdraft” in stocks, as Jon Hilsenrath pointed out in The Wall Street Journal. The struggles of emerging markets and the tapering of the Federal Reserve’s money-printing programme are headwinds for stocks, as is China’s slowdown.
But the real worry for now is that – contrary to popular belief – the US economy won’t reach ‘escape velocity’ and start a sustainable recovery this year. In short, “hopes for economic growth and the profit growth that come with it got too high”.
That’s for sure, said Michael Mackenzie in the Financial Times. Earnings growth over the past two years has been pedestrian, even as the S&P has gained 54%, including reinvested dividends. Sales growth still hasn’t really taken off. Results for the fourth quarter of 2013 are pointing to a rise of 0.8%, down from 3% in the third quarter. And profit margins are already historically high. Investors may finally be starting to realise they’ve bid stocks up too high.
All the same, fears of a renewed slump in US growth look overblown, reckoned Capital Economics. The second half of 2013 was “very strong, and there’s no obvious reason why the recovery should suddenly collapse”. The unusually severe weather is more than likely the key reason for the data disappointments.
This could continue to affect the data for a while – so today’s jobless figures may be subdued. But with a stronger Europe offsetting slower emerging markets, and government spending squabbles in the US having less impact this year, America looks in solid shape. It should manage to expand by 2.5% this year.