Global stock markets are in a selloff with the epicenter being in Europe. The global recovery since the great recession of 2008-2009 has been slow all around. Economic growth in Europe continues to lag the US which it has historically. The decline we are currently seeing is not a repeat of the 2008-2009 recession where we experienced catastrophic failure in the credit markets. I will share several data points I monitor that highlight the difference.
Gross Domestic Product
Data reported by the European Commission shows that the 18 euro countries had zero real growth in the second quarter of 2014. German factory orders declined 5.7% in August and German Real Gross Domestic Product (GDP) is zero or slightly negative. In comparison the U.S. second quarter GDP came in at positive 4.6%. The weak European economic data, although not a surprise, is weighing on stock exchanges and may be an indicator that current European policies are not advantageous for economic growth.
The Purchasing Managers Index (PMI) is reported monthly and is an indicator of the overall health of the manufacturing sector. Over the last year the U.S. index has been gradually moving up. In comparison, China and Europe, countries which more heavily rely on manufacturing have reported near flat PMI numbers.
Corporate earnings is a key driver to market returns. If you asked a CEO in 2008 about their earnings outlook, many answered with uncertainty. Since then corporations have steadily increased their earnings-per-share, many reporting record highs in 2014. This is illustrated in the below chart from 2008 through 2014, representing 10 of the 30 corporations in the Dow Jones Industrial Average.
|General Electric (GE)||1.97||1.18||1.14||1.33||1.38||1.46||1.67|
|United Technologies (UTX)||4.96||4.58||5.03||5.35||5.36||6.22||6.84|
|Procter & Gamble (PG)||3.42||3.47||3.67||3.87||3.85||4.02||4.22|
|3M Co (MMM)||5.17||4.69||5.75||5.96||6.36||6.72||7.46|
|Home Depot (HD)||2.17||1.18||1.63||2.03||2.47||3.07||3.76|
In summary, U.S. corporations are in good shape.
The U.S. budget deficit as a percentage of our GDP is another important metric. The government was operating at a 10% deficit in 2009 but the latest figures for the 3rd quarter shows a deficit of just 2.9%. This is a level we saw in the late 1980’s through the mid 1990’s. The U.S. government budget equates to roughly 35% of GDP while in Europe it has historically been much higher, closer to 50%.
Since 2008 big banks have rigorously shored up their balance sheets at the bequest of the U.S government, accomplished through government backed loans and increased liquidity and risk measures. Europe on the other has not gone to such lengths to strengthen their banking industry. A weaker banking system coupled with the larger percentage of government spending in Europe has proven to be a strain on European economic expansion and the overall ability to recover from a recession.
A recession is defined by a decline in GDP for two consecutive quarters or longer. The U.S. is obviously not in this situation. We don’t have extenuating circumstances – such as a credit crisis – that leads economists to believe we are even approaching a period of economic downturn. We are seeing a correction, which is a periodic part of the stock market. Europe has some worrying economic fundamentals but the U.S. is in a far different position.
One bright spot in the recent selloff is oil prices falling to a five-year low, with gas prices at the pump following suit. A one-cent reduction in gas prices equates to $1 billion per annum in consumer savings.  We would expect to see some of this savings funneled into other industries such as retail, especially as the holiday season ramps up.
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 Wall Street Journal, Global Oil Glut Sends Prices Plunging, (October 14, 2014)