Is This the Final Stage of Economic Growth?

Are we in the final stages of economic growth? The first way to answer that question is a definitive no. This pertains to the economy being cyclical over the long haul. Have you ever noticed that when the economy and stock market are roaring, people think it will never end? And that when the economy and stock market are in shambles, people feel as though things will never turn around for the better? In both instances, strong arguments can be made based on current conditions. This might relate to job opportunities, central bank policies, entitlement funding, private debt levels, corporate debt levels, oil prices, etc. The list goes on and on. But things never stay the same.

As far as the near term is concerned, nobody knows what will happen next. This largely relates to monetary stimulus versus economic reality, which brings us to the next point. If we look at the next several years, it’s likely going to get ugly somewhere along the line. There is no telling when this will occur, or what the ultimate catalyst will be. The most important fact is that economies around the world are slowing. (For more, see: 3 Economic Challenges the U.S. Faces in 2016.)

Economic Survey Results

A recent survey by Bank of America Merrill Lynch Global Research found that 59% of fund managers believe this is the final stage of economic growth, the highest reading since the financial crisis.

The Global All Industry Outlook Index fell to 50.6 in February from 52.6 in January. Not only is the drop concerning, but anything below 50 indicates contraction. The survey also concluded that output growth has slowed in the United States, the Eurozone, Japan, the United Kingdom and Japan. If you didn’t notice China, don’t feel too optimistic about the second-largest economy in the world. According to Reuters, China’s service sector slowed, which potentially relates to the manufacturing slowdown in China spreading to the services sector. (For more, see: 6 Factors That Point to Global Recession in 2016.)

It has recently been reported that the United States is the only growing major economy in the world. That might be true but also, consider that according to FactSet, S&P 500 earnings are now falling at the fastest pace since the financial crisis. When you look at the readings for the following sectors on a domestic basis, you will notice a trend.

Services

January 53.2

February 49.7

Manufacturing + Services

January 53.2

February 50.0

Non-Manufacturing

January 53.5

February 53.4

Employment

January 52.1

February 49.7

The reason you don’t see stocks falling is because poor economic readings lead to the Federal Reserve being more dovish, which investors and traders like, pushing stocks higher. The danger is that these might be artificial moves. David Hensley, director of global economics for JPMorgan Chase & Co., seems to think that’s the case. One of his recent quotes: “February PMIsurveys further highlight the broad-based weakness in global growth during the opening quarter of 2016.” Hensley is not alone.

Michael Darda, chief economist and marketing strategist at MKM Partners, believes that we’re late in the game and that a recession is approaching. He recommends getting defensive and diversified. (For more, see: Will Recession Become Reality in 2016?)

To add to these concerns, the IMF projects 3.4% global growth in 2016 but warned that it could cut that expectation. It cited the following risks: China slowdown, stronger U.S. dollar, geopolitical tensions and renewed global risk aversion.

The Bottom Line

While this rally could continue, some economists and fund managers believe that global and domestic economic growth is slowing. (For more, see: 3 Global Economic Challenges for Investors in 2016.)

Dan Moskowitz is long/short, but net short the market.