New Year's optimism of many investors seems to have been overshadowed in recent days by fears of a slowdown in economic growth due to higher interest rates. However, according to Dambis Moyo, an American economist and bestselling author of How the West Died, in his article on Project Syndicate, one should not be surprised if the current sharp drop in quotes will be followed by a quick return to the bull market, at least in the short term.
Despite the recent downturn, sentiment-boosting sentiment is still at odds with the worries of political leaders.
Market participants can easily forgive their euphoria at the beginning of the year. After a good 2017, key macroeconomic indicators (unemployment, inflation, business and consumer confidence indices), as well as forecasts of GDP growth indicated that strong economic growth will continue in 2018.
In the United States and most large economies, the result has been a rare – in the context of the past decade – moment of optimism. Macroeconomic statistics are almost everywhere positive, inflation remains under control. And the recent increase in forecasts of global economic growth by the International Monetary Fund occurred precisely at that moment in the economic cycle, when, it would seem, the economy should begin to show signs of slowing growth.
In addition, the record highs observed in the stock markets no longer depend so much on soft monetary policy. Bullish sentiment is based on evidence of a notable increase in capital investment. In the United States, gross domestic private investment grew by 5.1% (year-on-year) in the fourth quarter of 2017, this figure is almost 90% higher than in the third quarter of 2009 – at the peak of the Great Recession.
This indicates a deeper recovery in corporate spending, as evidenced by the figures for durable goods orders. The volume of new orders for durable goods manufactured in the United States exceeds expectations: they increased by 2.9% (month to month) in December 2017 and by 1.7% in November.
There are other statistics that show a similar picture. In 2017, the index of industrial production and capacity utilization calculated by the US Federal Reserve recorded the largest growth since 2010 during the calendar year, an increase of 3.6%. In addition, the reiteration by the President of the United States of America, Donald Trump, of his promise to find $ 1.5 trillion in infrastructure spending and state capital programs will further support positive market sentiment.
All of these bullish sentiments are in sharp contrast to the warnings many world leaders have made, including in the past few weeks. German Chancellor Angela Merkel said the existing international order is in jeopardy. French President Emmanuel Macron noted that globalization is undergoing a powerful crisis, and Canadian Prime Minister Justin Trudeau believes that the mess that we see in the world is quite tangible and "not going to disappear."
In the end, politicians may be right, and regardless of whether the current correction is the result of all these fears or not. And if only because in the world serious geopolitical risks remain. In 2017, the developed world populism index, compiled by Bridgewater Associates, peaked since the 1930s. due to the growth of populist movements in the USA, Great Britain, Spain, France and Italy. While populism remains a political threat, the risk of a transition to a reactionary policy of trade protectionism and increased control over capital flows remains elevated, which could undermine economic growth.
At the same time, markets incorrectly assess long-term structural problems, in particular, growing and unsustainable global debt, as well as unclear budget prospects, especially in the USA, where the budget deficit was the cost of economic recovery. In other words, a short-term improvement in the economy is supported by measures that threaten to drown it in the long run.
For example, according to forecasts of the Congressional Budget Office (abbreviated CBO), while maintaining current trends over the next 30 years, the US budget deficit will triple: from 2.9% of GDP in 2017 to 9.8% in 2047. “The prospects are a large and growing public debt, the CBO warns, “pose significant risks to the state and pose difficult challenges for the authorities to solve.”
Differences in views between business and political leaders are mainly due to differences in their time horizons.. Most company executives, due to the short-term interests of stock markets, focus on the next 12 months, while politicians are more focused on medium-term prospects.
In 2018, business leaders and market participants should (and they certainly will) remember that we are approaching the day of reckoning for today's economic recovery. Fluctuations in capital markets in recent days show that awareness of this inevitable retribution is already emerging.