The European Commission said Wednesday that its Business Climate Indicator rose in November to hit its strongest since June 2007. The outlook for both production and export orders improved, indicating the economy is benefiting from the upswing in global demand.
–Bloomberg News
Why would I be writing about ‘danger’ when we are experiencing the first synchronized global economic upturn in over 8 years?
It’s the business cycle.
The last time I was this bullish on the global economy, it was 2009. And I was forced to defend my optimism because we were coming out of a deep, deep recession. And March 2009 was a great time to buy shares. People like Jeremy Grantham were calling this moment in real time too. But that was at the beginning of the business cycle, when shares were deeply oversold, with the S&P 500 famously hitting 666 on the downside.
Now we are deep into the business cycle. And so I am not the only one who is bullish on the economic outlook. Everyone is bullish. And for good reason. Look at the Atlanta Fed’s Q4 GDPNow tracker. The latest forecast is for 3.4%. That’s after the two previous quarters were also over 3%. Data released just this morning shows Q3 at an even faster 3.3% than the first estimate of 3.1%.
It’s not inconceivable, given upbeat forward-looking data like the New Orders index in the latest ISM Non-Manufacturing Report on Business, that we get thru 4 consecutive quarters of 3%+ growth in the US. That would break us out of the 2%ish channel we have been in for almost the entirety of the business cycle.
What that means, of course, is that the news is priced in. Market valuations reflect optimism about the economy, now and into the foreseeable future. In fact, I would argue that the signs of ‘irrational exuberance’ – or ‘animal spirits’ or whatever you want to call it – are all around us. In the US, this is true whether you look at high grade or high yield credit. And whether you look at bonds or equities.
