With the recent weakness in Europe and China, US investors have begun to worry about the potential for a global economic recession. We can’t get in the heads of all investors to determine why they are selling, but we can put two and two together. The US stock market is falling after weak global economic data has come out. The dollar is at a 16 week high as the Fed is more hawkish than the other developed market central banks. The strong dollar is also caused by the slowdown in global economies such as in Europe. Oil prices are down 12 straight days which is a record long streak resulting from forces such as the strong dollar, US removing sanctions from eight countries which increases the supply, and the weak global growth outlook. The bright side to oil’s decline is it will decrease input cost inflation and help the US consumer right before the holiday shopping season. The reason that’s potentially significant is consumption is the main component of GDP.
Bank of America Merrill Lynch asked fund managers about the potential for a global recession in 2019 since this risk has been driving U.S. equity prices lower. As you can see from the chart below, just over 10% believe there will be a global recession and over 80% don’t think there will be one.
Source: Merrill Lynch
The hope for the bullish investors is all these smart money managers are correct. The bad news is this risk isn’t even close to priced in. Economic data needs to weaken more to convince fund mangers there will be a recession. By the time they are convinced, stocks will be much closer to being a buy than now. The bad news is the current trajectory is lower.
Fund managers agree there’s economic weakness. The good news is since the lowest percentage of fund managers are optimistic on real global growth since the financial crisis, if the economy has a turnaround, stocks will soar. The problem here is fund managers have had a good track record of predicting weakness. Very few in 2006 expected real global growth in the next year when the U.S. recession started in late 2007. The chart below shows a net 44% think global growth will slow which is the worst reading since November 2008.
