We all know what happened in 2009; the global recession occurred when the demand around the globe collapsed. In 2009, world exports saw their biggest contraction since the Second World War. (Source: “WTO sees 9% global trade decline in 2009 as recession strikes,” World Trade Organization, March 23, 2009, last accessed November 7, 2012.)
Fast-forward to the fall of 2012 and regions around the world are witnessing dramatic slowdowns in their exports. Those countries that were once the leaders in exports in the global economy are now seeing a marked downward slide in their trade.
In 2005, exports from the European Union (E.U.) accounted for 40% of the global economy’s total exports. In 2011, it exported only 34%. (Source: Word Trade Organization, October 2012.) Now, with the eurozone crisis taking a heavy toll, exports into the global economy from the E.U. are facing a further decline.
New manufacturing export orders in the eurozone have been declining for 16 consecutive months. Germany, France, Austria and Greece are at the forefront, seeing substantial export slumps. (Source: Markit, November 2, 2012.)
Similarly, in 2010, the U.S. was responsible for 21% of all the exports in the global economy. In 2011, this increased to 16%. With the U.S. still not recovered from the Great Recession of 2009, U.S. exports are showing weakness once again. The U.S. Purchasing Managers’ Index (PMI) for October showed that new export orders have now fallen for five consecutive months. (Source: Institute for Supply Management, November 1, 2012).
Export orders for manufacturers from the emerging markets to the global economy have fallen for three straight quarters. They are experiencing the worst decline since the first quarter of 2009. (Source: “HSBC Emerging Markets Index Q3 2012,” HSBC, October 10, 2012, last accessed November 7, 2012.)
Growing exports—what a country makes and wants to ship to buyers outside of its boundary—are fundamental to strong economies. But with exports declining around the world, a global recession becomes a very stark possibility. I’m really surprised the media hasn’t picked-up on the worldwide trend of falling exports.
Looking ahead, seeing exports decline consistently and rapidly, it makes me more concerned about a possible global recession springing up on us in 2013. Economic conditions around the world are poor. This time around, a global recession will create bigger problems than it did in 2009, as central banks have run out of weapons to fight it. Interest rates can’t fall below zero; the more money printed, the more the chances of rapid inflation. The year 2013 could prove to be a very difficult year.
Key stock indices are only as good as the companies that make up those indices. If the companies on the key stock indices perform poorly, the overall index will decline. Similarly, for key stock indices to rise, you want to see the companies perform well.
We are currently in the midst of one of the worst earnings seasons I have witnessed in a while. Large and small-cap companies in key stock indices have been showing poor results. My worry doesn’t end just here. The fourth-quarter earnings outlook is looking to be bleaker than the third quarter.
So far, 68 companies in key stock indices like the S&P 500 have provided their earnings outlook for fourth quarter—52 of these companies have provided a negative outlook. (Source: FactSet, October 31, 2012, last accessed November 7, 2012.). Hence, from the companies that have provided an earnings outlook for the fourth quarter, about 76% are lowering their earnings forecasts from previous guidance.
To make matters worse, the CEO Confidence Index, a measure of the reflections of CEOs on the economy, fell in the third quarter. Business leaders are concerned about the current state and future of the U.S. economy. Less than 12% of CEOs believe that the U.S. economy will improve in the next six months. (Source: “CEO Confidence Declines Again,” The Conference Board, October 4, 2012, last accessed November 7, 2012.)
Poor third-quarter earnings results, downgrades for fourth-quarter earnings, and down-and-out CEOs with a negative market view—all this makes me skeptical about the current state of the key stock indices. Markets are floating in shark-infested waters.
With world exports in a sharp decline, it’s easy to understand why public company profits are being squeezed. Add to the mix a U.S. consumer whose real disposable income has steadily declined along with his savings, and corporate revenue growth comes under pressure. At the end of the day, key stock indices trade on earnings and revenue growth. When there is no growth in either, stock prices regress to the mean, which means they eventually fall.
Where the Market Stands; Where It’s Headed:
Unless someone pulls a rabbit out of a hat, there is no saving this stock market. Bottom line, earnings growth just isn’t there anymore.
What He Said:
“Partying Like a Drunken Sailor: The party continues. Stocks are making new highs and people are spending like there is no tomorrow. Why? I really don’t know. Big (cap) stocks, they just continue going up. Wall Street bonuses are at record levels. Popular consumer goods are flying off the shelves. Designer clothes, fast and expensive cars, restaurants with one hour waits…people are spending in America today at an unbelievable clip. 1932, 1933…who remembers those years? The depression of the 1930s was the biggest bust of modern history. 2005, 2006, 2007…welcome to the biggest boom of the same period. When will it all end? Soon, my dear reader. Soon.” Michael Lombardi in Profit Confidential, February 7, 2007. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.