These 2 Indicators Say a Global Slowdown Could Be Imminent
The world economy could be on the cusp of a severe slowdown. Investors take note. If true, it could mean severe volatility and lots of opportunities.
Here’s what you need to know:
The best way to gauge what’s happening in the global economy is to pay attention to indicators that provide insights into global trade and manufacturing. If trade and manufacturing in the world economy are slowing down, it’s a sign that demand is declining and that an economic slowdown is fast approaching.
Take a look at the chart below. It plots the Baltic Dry Index (BDI). This index tracks the price of shipping dry bulk material—commodities like grain, metal, and coal. It’s a powerful indicator. If it increases in value, it’s a sign that demand in the global economy is hot. If it drops in value, it’s time to worry; it indicates that global economic growth could be stalling.
This index is affected by oil prices, but there’s more to it than that.
Since late 2021, the BDI has dropped by more than 80%! This says demand in the world economy has been tumbling very quickly. This shouldn’t be taken lightly.
Mind you, over the past 20 years or so, whenever the BDI has dropped by more than 80%, it was followed by some sort of weakness in the global economy. Will this time be any different?
Chart courtesy of StockCharts.com
Beyond the BDI, look at the J.P.Morgan Global Manufacturing PMI (the “PMI” stands for purchasing managers’ index). This index is generated by surveying purchasing managers from 13,500 companies in more than 40 countries around the world, accounting for 98% of the global manufacturing value added.
Essentially, this indicator tells us how global manufacturing currently looks.
The J.P.Morgan Global Manufacturing PMI is built in a way that a reading below 50 means there’s a contraction in global manufacturing. In July, this index hit 48.8. This was a six-month low, and it indicated that operating conditions have been worsening for 10 consecutive months. (Source: “J.P.Morgan Global Manufacturing PMI,” JPMorgan Chase & Co, July 3, 2023.)
Worse, it indicates that business confidence has been worsening globally. In the U.S., it hit a six-month low; in mainland China, it hit an eight-month low; and in the euro area, it hit a seven-month low.
As World Economy Slows, This Is Why You Should Care
Dear reader, something wicked is coming for the global economy.
You might be thinking, why worry about what happens in the world economy? As an investor, it’s important to look at what’s happening worldwide because it can have an impact on economic and asset performance across the board.
For example, the U.S. is not an island; it does business with other countries. So, if the global economy starts to slow, it could have a direct impact on the U.S. gross domestic product (GDP).
Stocks could also be affected. While 70% of the revenue of S&P 500 companies comes from the U.S., 30% comes from outside of the U.S. This means, for every $1.00 of revenue, $0.30 is affected by what happens outside of the U.S.
If global economic growth tumbles but the U.S. economy—by some miracle—is able to avoid headwinds, how could the earnings of S&P 500 companies remain stable? If their earnings drop, will their stock prices remain high? Very unlikely.
But don’t stop at the stock market.
The oil market is a play on the world economy as well. It’s highly dependent on what happens in the global economy. If there’s an economic slowdown, oil prices will drop. In fact, over the past year or so, oil prices have really taken a hit. It’s another indicator that’s flashing red and saying the world economy could be headed toward a slowdown.
Moreover, industrial metals like copper, aluminum, zinc, lead, and silver are dependent on the global economic outlook. If the global economy suffers, metal prices come down.
And don’t forget that, over the years, the global financial system has become extremely interconnected. This is good when the world economy is growing, but not so good when the economy is anemic. For instance, a problem in the euro area’s banking system won’t remain a European problem for long. It could have a negative impact on the banking sector in the U.S. as well.
I will end with some food for thought: central banks around the world (but not China’s central bank) have been raising their interest rates. What will happen once the economic slowdown becomes evident? Will central banks panic and start cutting their interest rates?