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Fisher Investments
Fisher Investments
Articles (8)  | Author's Website |

Why Fisher Investments Thinks Investors Shouldn’t Have Meltdowns Over Slowdowns

Stretches of slower global growth don’t automatically end expansions or bull markets. Rather, mid-cycle slowdowns are normal occurrences during expansions

December 19, 2019

Back in the summer and early autumn, lackluster global economic data had folks fearing a recession loomed. Stock markets hit a speed bump, a stark change from early 2019’s torrid gains. Since then, however, data have begun improving, and stocks have resumed hitting new highs. Fisher Investments’ analysts think this illustrates a timeless lesson for investors—one crucial to keep in mind as pundits chatter about a potential 2020 recession. Stretches of slower global growth don’t automatically end expansions or bull markets. Rather, mid-cycle slowdowns are normal occurrences during expansions.

Summer headlines didn’t miss a beat when reporting weak economic data, especially when they pertained to Europe. For months, weaker eurozone manufacturing data fueled recession chatter—dampening sentiment toward the region overall. And across the Channel, lingering Brexit uncertainty weighed on most U.K. economic data, extending the gloom. U.S. manufacturing data hit the skids and The Conference Board’s Leading Economic Index for the U.S. decelerated, falling in three straight months in late 2019. Chinese retail sales, industrial production and fixed investment weakened for much of this year. In Japan, Q3 2019 GDP growth disappointed as exports fell—problematic since external demand is one of Japan’s most important economic drivers.

Since then, however, there are signs of data improving. Several Chinese indicators ticked higher in November. Germany avoided a recession (using the common definition of two consecutive quarterly GDP declines) with GDP growing slightly in Q3. U.K. monthly GDP stabilized in October after two negative months. U.S. industrial production rebounded in November. Investors have seemingly noticed. Not only are markets rising again, but the pundits’ tone has changed. Recession dread no longer permeates financial news coverage. Rather, many pundits acknowledge the improvements and admit earlier expectations were too dreary.

In Fisher Investments’ view, those worried over the economy’s prospects erred by overrating manufacturing—the locus of most bad data. For instance, in the eurozone, where manufacturing fears reigned supreme, manufacturing makes up just 25% of GDP.[i] Services, which held up much better, accoun for 73% of its GDP—and are chugging along just fine.[ii] Same goes for Germany—the supposed manufacturing powerhouse folks seemed so worried about a few months back. Manufacturing makes up just 28% of German GDP, while services make up the lion’s share at 61%.[iii] There too, services purchasing managers indexes—monthly surveys reporting how many businesses grew—indicated expansion even as manufacturing faltered. [iv] Services helped German GDP grow in Q3, keeping the long-dreaded recession at bay.

Finding recent historical parallels would also have helped investors avoid making knee-jerk reactions to faltering data. Fisher Investments’ analysts believe this year’s weakness shared several striking similarities with mid-cycle slowdowns experienced earlier in this expansion—like in 2011 – 2012 and 2015 – 2016. Much like 2019, both periods featured global recession worries, due first to the eurozone crisis, then trouble in oil-reliant economies. Granted, the eurozone experienced a regional bear market and recession in 2011 – 2013. But the regional recession’s causes are absent today. There is no sovereign debt crisis triggering fears the currency union will splinter. Headlines still fight the last war, but no eurozone country seems to have problems financing debt today.

Additionally, both periods saw economic data slow. The U.S. LEI decelerated then, as it is now. In 2015 – 2016, global manufacturing contracted similarly to today. Plus, both periods featured global stock market corrections—sentiment-driven declines of around -10% to -20%—a lot like 2018’s.

Most recently, also echoing 2015 – 2016, relatively low oil prices have caused America’s shale oil producers to slash investment. As oil rig count fell this year, so did spending on new machinery and transportation equipment, which we think explains the continued weakness among American manufacturers. Should this continue, it wouldn’t surprise us if recession dread returned. If it does, keep in mind the U.S. economy weathered much worse oil industry troubles in 2015 – 2016. Energy firms’ cutbacks and weak oil prices conspired to pull total business investment and corporate earnings negative for a spell, yet the U.S. never entered recession, and the bull market continued. Stocks are adept at seeing through short-term problems in a given industry.

Even if global economic data don’t surge from here, it doesn’t mean stocks are doomed to sluggish returns. Slow growth—and fears of slow growth—have dogged stocks since this bull market began nearly 11 years ago, in March 2009. That hasn’t prevented it from becoming history’s longest. Rather, we think all the slow growth chatter helped keep sentiment from getting carried away, extending this bull’s lifespan. So don’t get spooked when pundits bemoan slower growth may indicate a recession is on the horizon. You could miss out on a big chunk of the bull market. In our view, that has far greater implications for long-term growth investors than sitting through a stretch of flattish markets.

Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.

[i] Source: OECD, FactSet, as of 12/17/2019.

[ii] Ibid.

[iii] Source: FactSet, as of 10/10/2019.

[iv] Source: IHS Markit, as of 12/17/2019.

About the author:

Fisher Investments
Fisher Investments is excited to share our insights and analysis with the many traders of Gurufocus.com. Our team looks carefully at economic and political events to identify the patterns and trends that run counter to traditional narratives. Fisher Investments believes that these unique interpretations, along with our top-down, customized and globally diversified approach to portfolio construction, allows us to better help our clients stay on the path to their investing goals.

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