Pick a map and point a finger at a major country, and chances are it’s either in an outright economic slowdown or showing weakness in its economic activity.
Take India. According to the country’s federal statistics office, in June, industrial output in the country contracted 2.2% from a year ago—expectations were for contraction of 1.2%. What’s even worse is that capital goods production for the month of June in India fell 6.6% from a year ago. This is important to note: capital goods production shows the level of investment activity in an economy. If investment slows, it’s an indication of an overall economic slowdown ahead. (Source: Reuters, August 12, 2013.)
Similarly, Japan, the third biggest economic hub in the global economy after China and the U.S., is also showing troubling statistics. The Japanese Ministry of Economy, Trade and Industry reported that seasonally adjusted industrial production for June declined 3.1% from a month ago. (Source: Ministry of Economy, Trade and Industry, August 12, 2013.) Remember: the Bank of Japan and the Japanese government have been working together to boost economic activity in the country through aggressive money printing.
In 2011, half of the companies on the S&P 500 provided figures about their sales from the global economy. The companies that reported said their sales from the global economy accounted for 46.1% of the total sales. (Source: S&P Dow Jones Indices, August 2012.)
Half of the S&P 500 companies getting sales from elsewhere in the global economy? That’s correct. Now, consider what happens to key stock indices as the global economy faces the threat of economic slowdown.
As the global economy deteriorates, and demand slows, even if we assume for a second that the U.S. economy is showing robust performance, the sales of half of the S&P 500 companies will be affected.
I find optimistic stock advisors to be completely ignoring the threat of economic slowdown in the global economy.
What we already know: as of August 2, the second-quarter corporate earnings growth rate of S&P 500 companies stood at 1.7%. (Source: FactSet, August 2, 2013). Earnings growth for the S&P 500 companies is clearly stalling! And we are seeing analysts reduce their estimates on the third-quarter corporate earnings growth rate of S&P 500 companies.
The odds of a severe economic slowdown in the global economy are increasing each passing day. It can’t be stressed enough: the global economic slowdown will have a deep impact on the key North American stock indices.