Slowing Economic Growth Bringing Down the Big Boys


Slowing Economic GrowthWe’re starting to see more of the impact of slowing economic growth, as several big-cap companies recently reduced their visibility for the year, citing declining growth rates in China and other emerging markets. The Procter & Gamble Company (NYSE/PG), McDonald’s Corporation (NYSE/MCD) and Adobe Systems Incorporated (NASDAQ/ADBE) are just a few of the companies saying that economic growth in emerging markets has dropped considerably, while business is very slow in the eurozone.

Recent stock market action has been less worrying concerning declining expectations for global economic growth; the stock market just experienced a correction because of this. Stock market trading action over the last two weeks has all to do with the Federal Reserve and the hope for more short-term stimulus. Slowing economic growth is a reality that multinational corporations will not be able to avoid, which is why it’s my preference that stock market investments be as domestic as possible. (I like railroad stocks in particular.)

Economic growth in the eurozone is pretty close to flat, while the U.S. economy should be able to squeak out a percent or two this year. The global economy could use a reacceleration in Chinese economic growth, and it’s likely that there will be more policy action from that country to help. Of course, China can afford to do so because it doesn’t have the sovereign debt problems of Western countries. The U.S. stock market now trades off Chinese economic news so any new stimulus measures from that country will boost domestic equity markets.

One company that always reports early is Oracle Corporation (NASDAQ/ORCL), which is one of the world’s largest enterprise software and database companies. Oracle reported quarterly results that were stronger than expected, based on strong sales of new software licenses. The company also announced an additional $10.0 billion in new share buybacks. (See “Dividend Increases Soar as Companies Return Excess Cash.”) Oracle’s stock market price is fairly cheap, and it’s been in a downtrend for the last 12 months. The company’s results are helpful and they reveal that corporate IT spending isn’t waning like other parts of the economy. After the results, Wall Street lifted earnings estimates on Oracle for the next two fiscal years.

As I’ve been writing, some companies are doing much better than others, and this is a global trend that will continue because of declining economic growth rates in the world’s largest economies. As for the stock market, I still think we can close out the year with a low double-digit gain plus dividends—but 2013 is likely to be a mess.