Stock Market Warning | World’s Growth Engines Slowing | Part 2
This blog is the second part of a 4 part series that reviews the growing number of warning signs for the stock market. These world economic problems could lead to a 7 to 10% or larger correction in the next 6 months. The focus for this article is the slowing growth from the two largest consuming countries in the world, the United States and China.
The growth engines for worldwide economies are the United States and China. MR could even argue that China has overtaken the US in the growth engine category in many areas. However, the growth prospects for the US are very limited based on current government policies. The real GDP growth rates have been barely 2% in 2012 and they will probably shrink due to a reduction in consumer spending (see MR’s Part 3 blog for more on consumers). So that leaves the world with China as the top growth engine.
China really has had a remarkable growth period for the last 10 to 15 years. Many years have exceeded 8% GDP growth and some have been over 12%. Unfortunately, that has changed in the last few years. The latest GDP reports are below 7% and some believe they actually may be closer to 5%. The problem with all reported Chinese data in the news is that it is unclear how accurate it is. There are always hidden agendas in China depending on world politics, home country politics, currency issues, and monetary policy, and the reports simply can’t be trusted a majority of the time.
China has been slowing but the degree of slowing is unclear and the bottom line GDP growth is therefore uncertain. The data reported from China last week showed that exports rose just 1% from a year ago and that imports rose just 4.7%. These numbers are significantly lower than the expected 8% for exports and 7% for imports.
China is the new growth engine for the majority of world-wide goods and commodities consumption and they have overtaken the US in many product categories. Some analysts are predicting a hard landing and more weakness going forward while others believe their turn around is getting close. For now, MR is in the latter camp although our certainty level is not high based on the potential for false reports.
Investors need China to have robust growth in both imports and exports to help spur on the rest of the world economies and the stock markets. That is not happening right now. Time will only tell whether China bounces back in the near future or whether much harder times are ahead for them and for the rest of the world economies due to their lack of growth.
The unrest and huge debt problems in Europe and the significant slowing of the United States and China’s economic growth are major warning signs pointing to a big potential stock market selloff in the next six months.
The significant growing number of economic worldwide issues may eventually overpower the recent hope induced rally based entirely on “future” quantitative easing. Without detailed proposals or real Fed and ECB actions in place, it is very difficult to get confident about the current two month rally having much more upside.
Investors can still stay long with the S&P 500 above its 50 SMA (> 1,370) but they should look to sell and protect their portfolios on any breakdown below the 200 SMA (< 1,330). Now is the time to start putting your selling and protection plan down on paper in case a big stock market selloff does start soon.
This concludes part 2 of Momentum Rider’s 4 part series on Stock Market Warning | World’s Growth Engines Slowing. Check out Part 1 if you haven’t read it yet.
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