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Disappointment

06/18/2018

As 2018 dawned, it looked like we were enjoying synchronized global growth.  The U.S. had led the world out of the recession and now looked forward to the increasing growth in Europe and Asia.  But that didn’t happen.  Instead, the U.S. has gotten stronger, while the others fell further behind.

For example, the Chinese central bank cancelled a scheduled increase in interest rates.  Capital Investment and Retail Sales both weakened last month.  The Chinese slowdown slowed the rest of Asia, as usual.

However, Europe has been an even bigger disappointment this year.  Eurozone growth has dropped from 0.7% in Q4 of last year to only 0.4% in the first quarter of this year.  The ECB has reduced its full year Eurozone growth estimate from 2.4% to 2.1%.  One big reason for this slowdown is Germany, the world’s third largest exporter, the level of exports has fallen in three of the first four months, dropping 2.5% in April alone.  Germany’s estimated full year GDP growth has been cut by half.

One minor reason was the surprisingly widespread flu epidemic.  A major reason was the populist takeover of the Italian parliament, which strengthened the wait-and-see attitude of corporations across Europe.  (Everybody remembers the fiscal crisis in 2010 precipitated by Greece.)  In January, 26% of German consumers expected economic conditions to deteriorate, compared with 43% today.  There is considerable anecdotal evidence that corporations are hunkering down and conserving their resources to survive a possible trade war, which is prudent. Rising caution is a wet blanket on the stock market.

This is not to suggest an investor should sell their international stocks.  Don’t forget — A well diversified portfolio will include some exposure to international stocks.

The President said trade wars are “easy to win.” 

Let us pray . . . for a quick peace!

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