Why Stock Prices Will Continue to Fall

Stock Prices Will Continue to FallNow that the Dow Jones Industrial Average has fallen 1,035 points (six percent) from its mid-September peak, the question investors are asking is “how far will she go?” For small-cap investors, the drama is greater, as the Russell 2000 Index has fallen 12.5% from its July peak.

Since 2009, every market pullback presented investors with an opportunity to get back into stocks at discounted prices. Even some editors here at Lombardi Publishing Corporation see the recent pullback in stocks as an opportunity.

But what happens if it is different this time? How about if stocks just keep falling?

If you have been a long-term follower of my column, you know I have been adamant about an economic slowdown in the global economy.

And let’s face it: the American stock markets have been addicted to the easy money policies of the Federal Reserve, namely money printing and record-low interest rates. But that is all coming to an end now. The Fed will be out of the money printing business soon and it has warned us on several occasions that interest rates will need to rise.

The International Monetary Fund (IMF) is now (or should I say, is finally) warning about an economic slowdown in the global economy. In its most recent global growth forecast, the IMF said, “With weaker-than-expected global growth for the first half of 2014 and increased downside risks, the projected pickup in growth may again fail to materialize or fall short of expectation.” The IMF also said the global economy may never see the kind of expansion it experienced prior to the financial crisis. (Source: “IMF says economic growth may never return to pre-crisis levels,” The Guardian, October 7, 2014.)

And key indicators that can tell us about the health of the global economy are suggesting an economic slowdown is coming sooner. Consider the chart of crude oil prices below.

Light Crude Oil - Spot Price Chart

Chart courtesy of www.StockCharts.com

Crude oil prices are plunging lower. This tells us demand is declining in the global economy for oil—a commodity that is used in almost every industry. Falling oil prices tell us that production at companies is stalling.

Other key indicators (that foresee demand in the global economy) like the Baltic Dry Index and industrial metal prices—are plunging as well. They are outright suggesting sluggish demand in the global economy is slowing, making an economic slowdown inevitable.

Germany, once the strongest economy in the eurozone and the fourth-biggest economy in the world, is seeing industrial production plunge. In August, industrial production in Germany had its biggest monthly decline since 2009. Other major economies, like China and Japan, have their own set of troubles. And as the bigger countries stall, the smaller countries feel the effects.

While some stock advisors have already started to say this correction offers a good opportunity to buy stocks low, I completely disagree with this notion.

A significant number of companies in key stock indices have exposure to the global economy. If the there’s an economic slowdown, and all indications point to that, you can expect their corporate earnings to be affected.

Yes, we may have some good earnings reports coming in for the third quarter of this year (to be announced over the next couple of months), but going into 2015, corporate earnings growth looks questionable. The stock market is a leading indicator; what we are seeing now in falling stock prices is an indication of the poor economy ahead in 2015.