US Outlook Report: Fear Replaces Greed on Wall Street
The IMF dropped a grenade on the stock market this week. Marking down the global growth outlook for this year for the seventh time to 3.3% and trimming expectations again for growth next year.
The biggest cuts to the global GDP outlook came from the Euro area, Japan, Brazil, and Russia. The Euro area forecast was cut to 0.8% for 2014. Japan was cut to 0.9%, Brazil to 0.3%, while Russia was cut to 0.8% this year.
The Eurozone still poses the biggest challenge to the global economy and is the source of the greatest downside risk to the outlook. The IMF puts a 38% probability of recession in Euro area over the coming year, and 25% recession probability for Japan. Probability of deflation is also the highest in the Euro area at 30% over the coming year. For other regions, the risk of deflation is negligible.
The IMF is raising a number of downside concerns that have clouded the outlook for the global economy. It cites worsening geopolitical tensions, a reversal of sanguine financial conditions, and in the medium-term, stagnation and lowered potential growth rates in both developed and developing countries. As if on cue, the German government released data that industrial production and exports plunged a worse-than-expected 4.0% and 5.8% in August. After the news, global stock markets sold off.
Since peaking on September 18 at 2,011, the S&P 500 stock market index has dropped 4.1%. This is the biggest drop since January when the market was fretting about the dismal economic data coming from unseasonably bad winter weather in the United States. Today, the source of volatility is coming from abroad. The stock declines in Europe have been twice as severe as in the U.S. over the past month.
By our estimation the stock market was ripe for a little shaking up. Investors have gotten complacent with steady gains over the past few years. The stock market has been advancing so relentlessly over the past two years that one is hard pressed to find a rosier period for stock investing.
Investor confidence had gotten to unsustainable levels. At the same time, valuations have gotten stretched on both a trailing and expected earnings basis.
So where do we go from here? No one knows for sure, but the stock declines could last for a while longer in my opinion. The equity markets go from celebrating continued loose monetary policy, as they did with the September FOMC Minutes, to wringing their hands about what that means for future growth prospects. We at Bank of the West Economics, along with the Fed, it seems, have grown more concerned about what the U.S. dollar strength and weak global economy means for the U.S. growth and inflation outlook next year.
To find out more, check out this week’s US Outlook Report.
Tags: economy
