As the global economy began to pull out of its tailspin this year, the markets began to anticipate an economic rebound quite correctly. The recession likely ended sometime this past summer for much of the world.
Does that mean that the markets have nowhere to go but up in response? Not necessarily. Markets tend to do a good job for the most part in being able to anticipate trend changes in the economy. The debate amongst investors and economists now centers on whether or not the economy is strong enough to stand on its own or whether it is still dependant on government assistance through ultra low interest rates and government spending.
Looking at third quarter GDP numbers from around the world, it seems somewhat surprising just how many countries reported GDP growth numbers below expectations. For example, Brazil’s economy – one of the strongest recipients of capital from investors around the world – reported that its economy grew by 1.3% instead of the expected 2% rate. In Canada, economists have had to temper their expectations of the economy’s rebound. The third quarter data show that the economy grew at a disappointing 0.4% annual rate whereas expectations were for 1%. Now, all eyes are on the fourth quarter and the hope that the US rebound continues.
Given that so many countries are trying to look to exports to lead the way towards economic growth, it is reasonable to ask “Who will be the buyer?” To that end, the world is still looking to the US consumer. Rightly, the US is pushing back on Asia and Europe by saying in effect – “you guys have to do your share of the lifting”.
Illustration: Courtesy – David Dees
Just recently, Australia’s Treasurer warned that the withdrawal of economic stimulus was a “dangerous misjudgment” and that without stimulus the Australian economy would have contracted. Australia’s central bank was amongst the first to begin hiking interest rates earlier this year.
At this point, investors should not be too concerned with the idea that the economy could fall back into recession – it is too early to know that yet. It is going to take some time to regain its footing and be able to function without the considerable support of government monetary and fiscal stimulus. That should serve as no surprise as there is a global deleveraging process underway and it will take some time.
However, investors should be careful when it comes to extending their investment portfolios too far in the belief that the markets will be able to continue the torrid pace they have been on. One of the greatest times to invest is coming out of a recession and some consolidation is a necessary adjustment process that often follows. Markets have begun to vacillate in a sideways range for the last several months. This is often the case after multi month bullish run-ups. However, investors should not take it for granted that the economy is necessarily going to make the jump to rapid growth. Challenges remain and markets may have gone a little too far, too fast for the time being.
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