It seems the global economy is taking a wrong turn. If it continues on the path it’s on now, it will not be a surprise to see a pullback in its growth. As a result of this, U.S.-based global companies may see their revenues and profits fall, which eventually leads to lower stock prices. You have to keep in mind that the U.S. economy is highly correlated with the global economy.
First, it seems that the demand in the global economy is slowing down as we enter into 2014. One of the indicators of demand in the global economy I look at is the Baltic Dry Index (BDI). The BDI is an index that tracks the shipping price of raw materials. If the index declines, it means demand in the global economy is slowing. If the BDI increases, it suggests the global economy may see an influx in demand. Below is the chart of the BDI. Note that since the beginning of this year, the index has collapsed more than 32% (as indicated by the circled area in the chart below).
But that isn’t all. We continue to see dismal economic data out of the major economic hubs of the global economy, too.
China, the second-biggest economic hub in the global economy, is showing signs of slowing down. The Chinese economy in the fourth quarter of 2013 grew at an annual pace of 7.7%. In the third quarter, this growth rate was 7.8%. (Source: “China’s Expansion Loses Momentum in Fourth Quarter,” Bloomberg, January 20, 2014.) Although this growth rate may sound very impressive when compared to the U.S. economy, looking at the past growth rate of the Chinese economy, 7.7% isn’t great at all. For 2014, the growth rate of the Chinese economy is expected to slow even further.
Japan, the third-biggest economy in the world, is also suggesting that the global economy’s growth may derail. In December of 2013, consumer confidence in the Japanese economy declined to its lowest level since December of 2012. The index indicated consumer confidence levels stood at 40.6 in December of 2013—and it’s been in a continuous decline since May of 2013. (Source: “Consumer Confidence Survey December 2013, “Cabinet Office, Government of Japan web site, January 17, 2014.) Consumer confidence is an indicator of consumer spending; if it declines, it suggests consumers will be spending less on the things they want—in other words, discretionary spending declines. The Japanese economy continues to face troubles with its exports to the global economy and bleak growth in its gross domestic product (GDP).
Consumer confidence here in the U.S., which is the biggest economic hub in the global economy, is declining as well. The Thomson Reuters/University of Michigan’s preliminary consumer sentiment data suggest that consumer confidence in January declined 2.5% from a month earlier. The index tracking consumer confidence sits at 80.4 in January, compared to 82.5 in December. (Source: Campos, R., “U.S. consumer sentiment dips in January,” Reuters, January 17, 2014.) In addition, the U.S. economy continues to face problems in its jobs market.
Here’s what I want my readers to understand: when bigger nations in the global economy face troubles, the smaller ones end up following the same trajectory, since they are highly dependent on the larger economies.
This means that if the global economy does move towards an economic slowdown, this will increase uncertainty in the stock market. Investors may be able to profit from this situation by hedging against uncertainty through exchange-traded funds (ETFs) like the SPDR Gold Shares (NYSEArca/GLD).