Global growth scare spooks stocks

Exuberant equity investors have been dealt a reality check by the grim outlook on the global recovery.

"I felt like I went 13 rounds with Mike Tyson every day last week," says Wedbush Equity Management's Stephen Massocca. America's S&P 500 fell by over 3% in an unusually volatile week: the other key US market barometer, the Dow Jones index, notched up its best day of the year on Wednesday 8 October and its worst the next day.

US stocks are close to three-month lows. The FTSE 100, down 8% from its recent peak, is at its lowest level since last summer.

The world economy looks weaker. "Finally the penny is dropping," says Economist.com's Buttonwood blog. Exuberant equity investors have managed to ignore the lacklustre world economy for some time now, but they have now been forced to confront the awkward fact that it "isn't really doing that well".

The tipping point was the latest batch of data from Germany. August saw the steepest falls in German exports, industrial orders and production since the depths of the global crisis in 2009.

After a dip between April and June, output might have shrunk again in the summer quarter. Two successive quarters of contraction is the official definition of recession.

"Investors have given up on Italy, and know that France is struggling, but for Germany, the engine of the eurozone, to be heading for recession is another matter," says Buttonwood.

713-DJIA

Japan has looked shakier in recent months due to the hike in the consumption tax. Falls in commodity prices in recent months, notably oil, reflect the worldwide slowdown.

The upshot is a "global growth scare", says Bank of America Merrill Lynch's Gustavo Reis. It's not the first time, says John Authers in the FT.

Several times in the five-year post-crisis rally investors have bid stocks up for months because they thought the US-led world economy was about to "achieve ignition and show strong growth". Each time something gave them second thoughts.

Time to turn on the money taps?

Nonetheless, stocks continued to reach new highs, thanks to central banks' unprecedented doses of cheap and free money. Last week's bounce came after the US Federal Reserve's latest minutes raised the prospect of zero interest rates lasting longer than expected, because the rising dollar could hamper growth.

Investors have been hoping that the European Central Bank would pick up the quantitative easing (QE) baton as the US began to raise rates. But last week's hostile comments on the issue by German officials suggest that QE could be delayed, or even indefinitely postponed. That would imply that the eurozone is set to slide into deflation and its Japan-style slump would be a drag on the world economy for years.

It has often been pointed out that the post-crisis environment was always likely to be subdued, given the huge debt load the world economy is carrying (virtually none of which has been worked off) and the ongoing ageing of the population.A slump in Europe would make thepost-crisis era even less dynamic.

This prospect, and political tension between anti-QE Germany and the rest of Europe, is set to keep rattling investors as the European economy softens. And there seems little to stop the downward drift for now. US earnings are vulnerable to disappointment amid overly generous profit forecasts, a strengthening dollar and historically high margins.

US valuations are too high: the cyclically adjusted price/earnings ratio of the S&P 500 is 26, over 50% above the long-term average. Whether debt-ridden economies can actually cope with higher interest rates, meanwhile, is another worry. Investors should prepare themselves for plenty more rounds with Mike Tyson.

Recommended

The top funds to invest in
Funds

The top funds to invest in

Investors continued to the passive preference throughout May, while high-yields were also sought. We look at the top funds, stocks and trusts that inv…
5 Jun 2023
Cheap and cheerful or reassuringly expensive?
Sponsored

Cheap and cheerful or reassuringly expensive?

Many investors aim to pick up “cheap” shares. But cheap does not always mean good value, says Max King. Quality comes at a price.
21 Dec 2022
Profit from patience
Advertisement Feature

Profit from patience

Smart investors will reap the rewards by staying focused on the long-term, research from Alliance Trust shows.
9 Dec 2022
Share tips of the week – 9 December
Share tips

Share tips of the week – 9 December

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
9 Dec 2022

Most Popular

How much will it cost you to retire early?
Pensions

How much will it cost you to retire early?

The pre-state pension income gap means couples may need an extra £136,000 if they want to retire at 60 – can you afford to retire early?
6 Jun 2023
Best debit and credit cards to use while travelling abroad
Personal finance

Best debit and credit cards to use while travelling abroad

If you’re going on holiday or travel abroad regularly, it’s worth knowing what the best card is to avoid hefty fees. We weigh up the charges and any p…
6 Jun 2023
Best easy access savings accounts – June 2023
Savings

Best easy access savings accounts – June 2023

Rising interest rates have boosted the returns on instant-access savings accounts and we're seeing some of the highest rates seen in years. We look at…
8 Jun 2023