Global economy: why it’s a year-end “mess”

Heck, it doesn’t look like Santa will be coming to the stock market this year. The blue-chip Dow Jones Industrial Average (DJIA) fell 185 points on Tuesday, prior to rallying to cut its loss—but this was followed by a 170-point intraday decline on Wednesday. Yesterday, the DOW did rally 63 points, but the index was up more than 200 points earlier in the session, so clearly, the apprehension continues to grip the market.

The volatility and stock market apprehension is even more amazing given that the DOW came within nine points of testing 18,000 just a few days back. The mainstream financial media was quickly talking about the DOW at 20,000 and how amazing the stock market bull run was. On CNBC, I heard a stock market pundit talk about how we were at the start of a colossal 15-year bull market.

Now, I’m not saying it can’t happen, as we have already seen decade-long stock market bull runs over the last few decades, so it could materialize. The real test, however, will be when bond yields and interest rates begin to ratchet higher, which will likely be sometime by mid-2015.

Economic Mess Forming in Global Economy

The key now will be the global economy and whether it can avert a sustained slowdown. It doesn’t help that Russian President Putin is causing unnecessary political strife that will likely drive his country’s economy into another recession next year—a move that will also impact Europe’s economies.

Meanwhile, Germany is struggling to regain its footing after spending so much money and effort trying to save the eurozone from a financial abyss. Without Germany and France, the eurozone fails. The German central bank, the Bundesbank, slashed its gross domestic product (GDP) growth estimate to 1.4% for this year and a mere one percent for next year. Inflation was also cut, which means there are expectations consumers will not be spending enough to drive up prices.

The key is stabilization in the global economy, but it could get worse before it gets any better.

China is looking scary, especially with liquidity issues in its financial system. The Chinese banks want to lend more money, but Beijing is refusing to allow this. The People’s Bank of China is tightening the liquidity at its banks. Clearly, there’s a sense the country’s real estate and financial markets are vulnerable to a sell-off in the Chinese stock market.

Just look at the ridiculous buying of the Shanghai Composite Index (SCI) over the past month that lifted Chinese stocks up 25%. The buying was euphoric and overdone, so it’s not a surprise to see a retrenchment on the Chinese stock market.

Japan also cut its third-quarter GDP growth to -1.9%. Prime Minister Shinzo Abe has called a snap election to take place later in December. The problem is that Abe has been spending large and printing money to drive the economy, but we are now witnessing some fragility. Increasing sales taxes to help pay for the lazy monetary and fiscal policies doesn’t make sense, as this action would attack consumers, who are largely responsible for the country’s economic renewal.

Oil Prices Contributing to Economic Weakness

The plummeting oil prices are also not helping the stock market. Oil is fast approaching $60.00 after OPEC (the Organization of the Petroleum Exporting Countries) cut its oil demand for 2015 to the lowest level in 12 years. The oil cartel blamed the abundant shale oil and lower global demand. Oil will need to find some support, but we could see a drop to below $60.00 in the meantime.

The Investment Opportunity…

I view major stock market weakness as an investment opportunity to accumulate stocks, as I sense there may be more gains for 2015 if the global economy stabilizes.

The most prudent action investors can take at this time is to pull some money off the table as we approach the year’s end. Investors could also consider using put options to hedge against downside risk.

 

 

 

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