For months, I have written in these pages about how the slowing global economy would wash ashore to America and infect our own companies. I posted repeated charts in Profit Confidential that showed leading indicators like the Baltic Dry Index and copper prices were collapsing, foretelling of poor economic conditions ahead. And wouldn’t you believe some of my own analysts ridiculed me in face of what was once the booming stock market? Believe it.
But what I predicted has come true. Historically proven economic indicators don’t simply stop working. Hopefully my loyal readers heeded my advice and took steps to protect themselves from the biggest byproduct of a slowing global economy—the stock market. It’s in full crash mode here in 2015.
While most of the mainstream news we hear today is about China’s economic struggles, other major hubs have been under economic stress for months.
Brazil, the biggest economy in Latin America, is just one example of how fast things can go wrong. The past few years were great for Brazil. But Brazil’s second-quarter 2015 gross domestic product (GDP) contracted 1.9% from the previous quarter. Looking at the first six months of 2015, the Brazilian economy contracted a total of 2.1%. Hence, Brazil is in a technical recession (this is when GDP declines for two consecutive quarters). (Source: Brazilian Institute of Geography and Statistics, last accessed August 28, 2015.)
And yesterday we heard that Canada is in a recession, too.
If we look at other big-economy countries like Japan, Russia, France, Italy, Spain, and Mexico, we see countries desperate for economic growth.
Trade Statistics Pointing Toward Misery
One of the indicators I follow closely is the Baltic Dry Index (BDI). At the very core, this index tells us about demand in the global economy. If the BDI is declining, it means global trade is declining. With this said, please look at the long-term chart of the BDI below.
Chart courtesy of www.StockCharts.com
The index has been collapsing. It’s down more than 50% from its 2014 highs and suggesting that demand and trade in the global economy are anemic.
As the CEO of Maersk Line, the largest container shipping group in the world, said while talking about his outlook for 2015, “There is nothing in container volume numbers that suggest that the global economy is just on the verge of starting a new growth trend.” (Source: Financial Times, March 1, 2015.)
Why You Should Care About the Struggling Global Economy
American companies with operations outside of the U.S. are struggling to increase revenue and profits—in fact, both corporate revenues and profits are in full contraction mode right now. And as countries around the world work to devalue their currencies, it’s making American products and services in the global economy non-competitive.
That’s really what the stock market collapse is all about. It’s about the plunge in the revenue and profit growth of American companies. After all, stock prices reflect the earnings of the companies that issue them. And with my expectation of a worsening global economy ahead, I believe stock prices will just continue to fall.