Shipping Collapse Signals It's Time for Caution on Foreign Stocks

Friday, February 22, 2019

I look at a lot of charts. Lots and lots of charts. Most are ambiguous or useless and don't tell me anything.

Every once in a while, though, I see one that makes me slap my forehead and say, "Wow!"

That happened when I saw the latest chart of the Baltic Dry Index. That's an index that measures the cost of transporting various "dry" materials — such as wheat, coal and steel — around the world.

In general, the higher the volume of international shipments, the more shipping companies can charge for transporting goods across the Atlantic and Pacific oceans.

Conversely, when global trade declines, shipping companies slash their prices.

High and Dry?

Take a look at how fast shipping costs have fallen. And see how shipping prices look vs. the S&P 500.

It takes more than one chart to convince me to put money to work in a new trade idea, or to redirect money from that idea.

However, a new report from the World Trade Organization, or WTO, confirms the Baltic Dry Index chart is ringing a loud alarm bell that the global economy is headed for some rough times.

Connect The Dots: WTO Warning

The WTO index of world trade has dropped to the lowest reading in nine years, falling to 96.3 in January and sharply below 98.6 in November.

Any reading below 100 indicates a drop in global trade.

The WTO indicator is a composite of seven trade numbers — merchandise trade volume, export orders, international air freight, container port throughput, car production and sales, electronic components and agricultural raw materials.

It's at the lowest level since March 2010.

The weakest parts of the index are export orders (95.3), international air freight (96.8), automobile production and sales (92.5), electronic components (88.7) and agricultural raw materials (94.3).

Per the WTO:

"This sustained loss of momentum highlights the urgency of reducing trade tensions, which together with continued political risks and financial volatility could foreshadow a broader economic downturn."

The International Monetary Fund echoed similar warnings in January, when it downwardly revised its 2019 world GDP forecast from 3.7% to 3.5%.

China: The (Shrinking)
Elephant in the Global Room

Much of the slowdown is coming from China.

  • Chinese imports plunged by 7.6% in 2018, a stark reversal from the 16.1% increase in 2017.
  • Chinese exports dropped 4.4% in December, largely because of the Trump tariffs.

And don't forget about the yet-to-be-determined impact from Brexit.

We live in a small world, and you can bet this surprisingly swift deterioration in the global economy could drag the U.S. economy down with it.

No major economy, including the U.S., will be immune.

Does that mean you should sell all your stocks and head for the hills? Nope, I am still very optimistic about the U.S. stock market.

On Feb. 1, I wrote about why I believed the January stock market rebound has legs, saying that this rally should continue thanks to multi-decade lows in unemployment and strong economic growth.

If you have large exposure to European and/or Asian stocks, however, I recommend you reevaluate your reasons for owning them. Moreover, I would urge you to consider the use of protective stops.

And make sure you read Martin Weiss' Feb. 4 issue where he addressed the danger of European "contagion" spending to the U.S.

Making money is fun. But managing risk and avoiding large losses is really the key to long-term wealth accumulation.

Like Sgt. Phil Esterhaus (Michael Conrad) of "Hill Street Blues" always said, "Let's be careful out there."

Best wishes,
Tony Sagami

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