There was troubling news out of Europe, with Germany reporting much weakened manufacturing and exports, and German leadership showing no signs of changing the very economic policies that have brought about the weakness. In addition, falling oil and industrial metals prices point to slowing growth in China, the strengthening dollar has people worried that US corporate earnings are going to be hurt, and many believe the markets are over valued as it is. That last point is debatable, particularly for the stocks in which we invest, as while many stocks are at nominally high valuations, other metrics such as Price to Earnings (P/E) are below historic averages.
One piece of gloomy news this week was the semi-annual IMF World Economic Outlook report, which claimed a 40% chance of eurozone recession, and global growth of 3.3%, a 0.4% downward adjustment of their April prediction. Interestingly, delving into the report produces a mixed view of the world – to officials in the developed world economic prospects are dimming, but in the developing world officials are considerably more upbeat. To them, global growth is faster than its average over the past 30 years, inequality is falling, and a number of countries are working hard to reform their economic and social systems.
When we look at the many variables, we are not so prone to gloom and doom. What we see is that unlike recent times, and the pre-crash days, rising tides are not lifting all boats and neither are the ebbing tides bringing down all boats. These times require not only judicious stock picking, but judicious country picking. As we noted last week, the location of a particular company is not as important as where and how it conducts its business.
Next week we will be watching Wednesday’s Producer Price Index report and Retail Sales report, Thursday’s Jobless Claims and Industrial Production reports, as well as the Philadelphia Fed Survey report, and Friday’s Housing Starts report.