The Risk-Reward Ratio of Buying Stocks Now

The Risk-Reward Ratio of Buying Stocks NowIn the third quarter of 2014, gross domestic product (GDP) for the eurozone region increased by 0.2% from the previous quarter, when it increased only 0.1%. The growth in the region has been very dismal. Major countries like Germany and France are facing economic scrutiny now. In the third quarter, Germany’s economy grew by only 0.1%; France’s GDP only increased by 0.3%. (Source: Eurostat, November 14, 2014.)

Italy, the third-biggest economy in the region, is in an outright recession. Its GDP declined by 0.1% in the third quarter after declining 0.2% in the second quarter.

It will not be surprising to see the entire common currency region enter into a recession in 2015.

On the other side of the world…

China shows signs of economic stress. The second-biggest economy grew at an anemic pace in the third quarter of 2014—its weakest economic growth since 1990. And there are other problems that haunt the Chinese economy, including the number of bad loans in the economy.

In the third quarter of 2014, bad loans in China increased the most since 2005—to 766.9 billion yuan.

Japan is in an outright recession.

Global Leaders Warning

Global leaders are worried about economic growth. At the G20 summit in Brisbane, Australia, David Cameron, prime minister of the UK, said, “red warning lights are flashing on the dashboard of the global economy.” About the eurozone, he explained, “The eurozone is teetering on the brink of a possible third recession, with high unemployment, falling growth and the real risk of falling prices too.” (Source: “David Cameron warns of looming second global crash,” The Guardian, November 17, 2014.)

Commodities Slump

While economic data suggest a global economic slowdown is inevitable, commodity prices are telling us the exact same thing. Across the board, we see a significant decline in commodity prices suggesting demand is anemic and factories are slow. Look at the price of crude oil; it continues to make new lows and currently sits at the lowest level since 2010.

Light Crude - Spot Price Chart

Chart courtesy of

Industrial metal prices are in a slump as well. Zinc, aluminum, copper, lead, and nickel prices have seen price drops in the past few months. Iron ore prices declined 40% this year alone and stand at levels not seen since 2008 and 2009.

Risk vs. Reward

Early indicators of the global economy are very clear in telling us there’s an economic slowdown in the making. So buying stocks at this juncture is risky. Market valuations in terms of both the dividend yields of stocks and their price/earnings multiples are stretched. Stocks are a good deal when the economy is pathetic and fear is ramped up (2009). Stocks are risky when the economy is slowing down and when the market rises on news of central bank stimulus as opposed to improving economic fundamentals—the exact situation we have today.