3 Macroeconomic Trends You Need To Know Now
The stock market has been climbing the wall of worry since the end of June when significant technical support at the 200-day simple moving average was violated on the downside. Since the plunge, the Dow Jones Industrial Average has rocketed above both the 50 and 200-day simple moving averages appearing to be on its way to test resistance in the 250 zone.
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The craziest thing is the stock market is moving higher in the face of extraordinary bearish pressures.
A brewing trade war with China, daily shocks from the White House, and geopolitical tensions can’t seem to damper the bullish enthusiasm.
How can this be possible?
The reason is there are major macroeconomic trends that are crushing the day-to-day bearish economic chaos. These trends are so dominant that there is little that can interfere outside of an extreme, unexpected systematic shock. This article will explain the three major economic trends fueling the super bull market.
#-ad_banner-#1. Low Global Interest Rates
Interest rates are a prime driver of stock prices. Globally, interest rates have been ultra-low as central banks scramble to help their economies prosper. Prime examples include a zero percent rate with the European Central Bank, a negative 0.75% rate in the Swiss economy and a 2% rate in the United States. At latest count, 17 out of 26 major central banks lowered interest rates at their last change.
Wait, isn’t the world’s largest economy raising rates now?
Yes, the United States has entered a regime of climbing rates. However, the Federal Reserve is well aware of how interest rates affect the stock market and overall economy.
While it is generally believed that climbing interest rates are damaging to the stock market, the truth is very different.
Evidence shows that it is the velocity and surprise factor of interest rate hikes that control how the stock market reacts. Over the last six significant periods of raising rates, the S&P 500 rallied 23% on average, according to a CNBC study.
Remember, the Fed is raising rates since the economy is rapidly expanding. A growing economy is the ultimate bullish scenario. As stated earlier, the Fed is cautious with the gentle rate increases by telegraphing them well in advance.
For now, the lowest global interest rate trend, despite the upticks, remains a tremendous tailwind for stocks.
2. Economic Growth
Ever-improving technology combined with higher consumer demand across most sectors has triggered an era of robust economic growth. Gross domestic product (GDP) is one way to measure growth. It is viewed over time via trends rather than a simple snapshot.
Helping gain an overall perspective, TradingEconomics.com provides an excellent historical look at U.S. GDP: “GDP Growth Rate in the United States averaged 3.21 percent from 1947 until 2018, reaching an all-time high of 16.90 percent in the first quarter of 1950 and a record low of -10 percent in the first quarter of 1958.”
While the growth rate from 2010 to 2016 averaged around 2%, it has jumped to an average of 2.5% over the last eighteen months.
While it is good to see the U.S. GDP trending higher, what has me most bullish is global growth in emerging markets
First, let’s take a look at Asia. The Asian Development Bank (ADB) has kept its growth estimates at 5.9-6.0% despite the pending Chinese tariffs. However, the ADB did add that clear risk exists should the tariff threat escalate.
According to FMG Funds, the prime factor in the bullish global growth outlook from 2017 to 2018 is the emerging market sector. Emerging markets are projected to expand at an estimated 4.9% in 2018 and is forecast to reach 5% for 2019. Growth is predicted to continue into 2021 at 5.1%.
Perhaps the most bullish factor for emerging markets growth is equity valuations. Presently, emerging market equities boast a cyclically adjusted P/E multiple of around 12.8 times. The long-term average is 25 times — indicating that emerging market stocks are trading at an incredible discount. When compared with developed markets, emerging markets trade at approximately 23% discount. I expect the discount to continue to attract significant institutional allocations pushing the sector higher over the long term.
Not only will the emerging markets growth trend continue to lead the global economy higher, but significant opportunities also exist in the sector for all investors!
3. Consumer Confidence
Consumer confidence is a prime driver of economic growth and stock prices. Confident consumers spend money, which in turn fuels economic expansion, leading to the subsequent improvement in corporate bottom lines. Consumer spending is a huge factor, accounting for 70% of U.S. economic.
The metric soared to 130 in February 2018 marking the highest level in nearly two decades. The trend of consumer confidence riding near record highs is a macro trend that will continue to push stocks higher.
Risks To Consider: Despite my bullish optimism, no one knows what the future holds. Always use stops and position size wisely when investing!
Action To Take: Stay long and consider diversifying into emerging markets.
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