Monthly Brief May 2018 – Global Economic Growth: Still Synchronized?
European political turmoil and renewed trade war rhetoric… May did not conclude with the tone of an “up” month for US equity markets. Yet, despite the final week, the S&P 500 Index posted a positive month for May. As a generally upbeat earnings season wound down, investors were shifting attention to the next “thing” and politics were readily available. Following a general election, the new Italian leadership threatened to take an anti-European Union stance, resulting in investors selling first and asking questions later. The perceived jump in risk quickly moved Italian interest rates higher, reverberating across global markets, and near-term caution replaced optimism. Not coincidentally, this upheaval was followed by the new Italian leadership’s rethinking their plans and, as the tone shifted to a more palatable path, local markets began to calm. Yet, the cautious global mood change persisted through month-end. The US dollar had strengthened, and US interest rates declined as investors sought the relative safe-haven of US Treasuries. While the markets appeared to have digested these events by month end, it was indicative of the prevailing sentiment – rising uncertainty. In this case, despite global economic data continuing to be viewed as a net positive, uncertainty regarding political events has served to call future economic growth rates into question, leading to investors reassessing their appetite for risk-taking. This is not necessarily a precursor to near term declines, but is often associated with choppy, sideways equity markets.
CHART OF INTEREST – GLOBAL ECONOMIC GROWTH: STILL SYNCHRONIZED?
During the current leg of the equity bull markets, one narrative often referenced as supporting further gains has been the case for “synchronized global growth”. This dynamic can be very powerful for financial asset values and the breadth of growing economies has indeed helped to support equity market gains. While global growth has been positive, investors are always assessing the probability of current conditions continuing into the future. A widely used gauge for this are the Citi Global Economic Surprise Indices provided by CitiGroup Global Markets, Inc. These indices measure how current economic data reports are exceeding or falling short of expectations (not necessarily if growth is positive or negative), with net positive reports providing a reading above zero and net shortfalls falling below. Of course, positive surprises tend to support equity markets while negative surprises can often lead to a rethinking of portfolio positioning.
This chart compares the US Index and the Eurozone Index. In mid-2017, amidst a backdrop of both trade policy and tax reform concerns, US economic data struggled to keep pace with the levels of optimism. But as the index rebounded mid-year, investors comfort with continued growth culminated in a strong fourth quarter for equity markets. Now it appears to be the Eurozone’s turn to call into question the persistence of current economic growth rates. With political issues in the spotlight, economic strength has recently been unable to meet expectations, dragging the index below zero. This, in part, reflects one aspect of why equity markets have struggled to continue their advance. And, these indices will continue to be watched closely as one variable that can help investors assess future opportunities and risks.
James Ferrin, CFA
Chief Investment Officer
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