Signs Are Pointing to the Economy Stalling in 2018
We are on the cusp of a global economic slowdown, and it could have a dire impact across the board, especially for stocks.
Let’s start with the second-biggest economic hub in the world, China. The Chinese economy was just downgraded by S&P Global Ratings. The agency said that debt in China is increasing too quickly. In 2016, China’s economy grew at its slowest pace since the 1990s. (Source: “S&P says downgraded China as credit growth still too fast,” Reuters, September 21, 2017.)
Turning to the United Kingdom, Moody’s Investors Service, Inc. recently downgraded the country’s financial rating. Moody’s states that public finances in the U.K. have deteriorated significantly, and that the country’s planned exit from the European Union (EU) could cause medium-term problems when it comes to government policymaking. The U.K. is the fifth-biggest economic hub in the global economy. (Source: “Rating Action: Moody’s downgrades UK’s rating to Aa2, changes outlook to stable,” Moody’s Investors Service, September 22, 2017.)
The eurozone’s economy is soft, too. With 19 member countries, the eurozone is the biggest economic region in the world. Economic growth this year and the next is expected to be anemic in the eurozone. There’s a possibility of another banking crisis in the region, and the idea of the eurozone breaking apart remains in play.
Japan, the third-biggest economic hub in the global economy, is struggling, with the Bank of Japan implementing a negative interest rate policy to spur the economy, but failing miserably.
What does this mean for American investors?
Too often, investors focus on the United States and forget that the global economy matters a lot. Many American companies have operations outside the country. So, if there’s a global economic slowdown, their sales and profits get hurt.
In 2016, 43.2% of all S&P 500 companies’ sales came from outside the United States, meaning that, for every $1.00 of sales, $0.432 came from outside of the country. (Source: “S&P 500 2016: Global Sales,” S&P Dow Jones Indices, last accessed September 25, 2017.)
Dear reader, an economic slowdown in the overall global economy, which is happening right now, could be devastating for the stock market. That’s another reason why I’m suggesting that investors with exposure to the North American stock market should tread lightly at this stage of the economic cycle.