The global macro picture is looking a little rosier despite weak economic data last week. The U.S. economy is not super robust, but the latest data suggest it does continue to expand, as evidenced in jobs data in particular. And news on the international wires shows that the euro zone continues to improve some, the Japanese economy is improving some, a couple of big emerging markets like India are improving some. The elephant in the room is China, which is merely stabilizing.
The trouble for the U.S. economy is housing. Starts and mortgage applications have recently fallen back to their lowest level since 1996 — even lower than 2010, which was a horrible year. It’s hard to see how the U.S. economy can get up to warp speed, which is defined as the level at which it can be the locomotive for the rest of the sluggish globe, without housing being in gear. C’mon, millennials — buy a freakin’ house. Don’t just rent. You are ruining the recovery for everyone else.
One of the most interesting developments elsewhere is that investors are starting to give euro-zone stocks the benefit of the doubt. European bank shares are up 8.5 percent year-to-date, partly in anticipation of the fact that the European Central Bank will begin quantitative easing next month. Also, jobs numbers in the U.K. are improving.
The stud right now in the global economy is India, led by the new pro-business government of Prime Minister Narendra Modi. The country is benefiting from lower crude oil prices to a large extent and is now on track to grow faster than China, according to Evercore estimates. This helps its neighbors, too, as real GDP growth in Thailand is estimated at 7.1 percent and Singapore is clocking in at 4.9 percent. The Indonesian stock market rallied to a new high last week — 5x over its 2009 low and double its 2007 peak.
But you cannot have a synchronized global recovery, which is the holy grail, without China — and it sure looks like Beijing has little intention of cooperating despite a rate cut this weekend.
Summing the global news up and balancing it against U.S. developments, it sure looks as if S&P 500 earnings will continue to weaken modestly this year, as they did in the fourth quarter of last year. Evercore cut its estimate for total S&P 500 earnings for 2015 to $122 from $127 three weeks ago, and cut it again to $120 last week. The biggest drag is energy companies, of course, but multinationals like Caterpillar, McDonald’s, and Microsoft are all contributing to the picture of an economic environment that is growing more slowly than expected.
Don’t get me wrong: Stocks can still be successful in this kind of environment. However, it will likely be more of a situation where owning stocks and bonds of real value will be critical. The path of least resistance is still higher after a brief pause that refreshes in March to relieve an overbought condition, but not every company or sector will make the trek at the same pace.
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Now, speaking of China, the People’s Bank made a surprise rate-cut decision over the weekend — slicing rates by a quarter point to 5.35 percent. That was the second rate cut in three months as the Chinese respond to a broadening slowdown that’s hitting housing and corporate profitability. Policymakers also singled out rapidly falling inflation as a motivating factor for the move.
From steel prices to electricity production, a bevy of anecdotal evidence suggests China is dragging as the communists in Beijing attempt to engineer a gentle shift in its growth model from debt-fueled housing, fixed-asset investment and exports to one focused on R&D and consumption. China Daily celebrated the fact that consumption was responsible for 51.2 percent of GDP growth last year vs. 48.6 percent from investment.
The central bank action brings the total number of central bank easing so far in 2015 to 21 — signaling that the global economy is hitting an air pocket. It also shows that even though U.S. quantitative easing has ended, other central banks are picking up the baton and running with it. QE Forever does not necessarily have to be branded with an American flag.
Best wishes,
Jon Markman
