That thud you hear is the sound of the global economy slowing down.
In the United States, growth has decelerated to a meagre pace of around 1.5 per cent a year, according to IHS Markit surveys of purchasing managers published on Monday. In Europe, the same surveys indicate German factories are in deep recession while the overall euro zone economy is barely growing at all.
In Canada, gross domestic product is likely to expand by only about 1.3 per cent this year, according to Bank of Canada estimates. Meanwhile, in China, industrial production grew at its slowest pace in 17 years in August.
No wonder so many investors feel uneasy. A recent survey of more than 200 of the world’s biggest asset managers by Absolute Strategy Research in London found they see a 52-per-cent chance of a global recession next year. It is the first time since the survey began in 2014 that these well-informed money managers put the likelihood of a recession at more than 50 per cent.
The widespread pessimism among the smart-money crowd suggests that now is a good time to be cautious. But it is not exactly a flashing alarm. Despite their gloom on the state of the global economy, the respondents in the Absolute Strategy survey also said they expect stocks to perform better than bonds over the next year.
Their faith in stocks despite slowing growth is not as odd as it may seem. Most stock markets around the world now deliver substantially more in dividends than bonds pay out in yield. So long as companies continue to deliver those payouts, people have good reason to hold on to their shares.
Rather than running for shelter, investors may want to consider exactly how much volatility they can comfortably endure. The answer is likely to hinge on how you see three threats to investor confidence playing out over the next year.
The first and most obvious threat is the potential for an all-out trade war. The United States and China have spent the past few months slapping tariffs on each other’s goods. Time after time, they have hurled threats, then backed off and agreed to talk things out. As long as the uncertainty persists, few companies will be eager to make big investments, and that will chill global trade.
The second threat is politics. The U.S. presidential campaign is just beginning to heat up. Until voters actually cast their ballots on Nov. 3, 2020, investors won’t know whether to count on another four years of government-by-tweet. On top of that, there is massive uncertainty around Brexit as well as the continuing threat of more turmoil in the Middle East.
The third threat is evidence that labour unrest is beginning to move from rhetoric to reality. This past week’s walkout by General Motors workers in the U.S. and a short-lived strike by British Airways pilots demonstrate wage pressures are growing. After a decade of unimpressive salary growth, many employees want a bigger piece of the pie.
Perhaps stock prices will overcome the combined threats from trade, politics and wage demands. But investors should be braced for twists and turns.
At Capital Economics, for instance, chief markets economist John Higgins expects U.S. stocks to lose about 16 per cent between now and year end as earnings fall short of expectations and the U.S. Federal Reserve fails to deliver as much in the way of lower interest rates as investors are expecting. Bonds will generate small, but positive, returns in that scenario. But he then sees Wall Street rebounding as the United States manages to steer clear of a recession. Over 2020 and 2021, he expects U.S. stocks to produce annual average gains in excess of 10 per cent, while bond prices edge downward.
Given the inherent uncertainty of market forecasts, it is probably best not to put too much faith in any exact schedule for asset shuffles. The broader message is that neither stocks nor bonds seem guaranteed to produce steady gains over the next couple of years. Until the current threats resolve themselves, that is unlikely to change.
Ian McGugan