A Global Issue That Could Damage American Stocks
The global economy looks to be in trouble, with the problems brewing quickly. Major economic hubs in the global economy are struggling for growth, but are failing—a fact that is largely ignored by the mainstream.
Long-term investors need to know that an economic slowdown in the global economy can deeply affect the key stock indices here in the U.S. economy. The reason for this is very simple: American-based companies operate throughout the global economy. As a matter of fact, in 2012, for the S&P 500 companies that provide data about sales in the global economy, 46.6% of all sales came from outside of the U.S. (Source: “S&P 500 2012: Global Sales – Year In Review,” S&P Dow Jones Indices web site, August 2013.)
Clearly, if there is an economic slowdown, the demand will decrease and the U.S.-based companies will sell less and earn less profit. As a result, their stock prices will decline.
So what is really happening?
In the beginning of the year, there was a significant amount of noise about how the global economy will experience growth. This did not happen.
The International Monetary Fund (IMF) expects the global economy to grow by 2.9% this year after seeing growth of 3.9% in 2011 and 3.2% in 2012. In 2014, the IMF expects the global economy to increase by 3.6%. (Source: Duttagupta, R. and Helbling, T., “Global Growth Patterns Shifting, Says IMF WEO,” International Monetary Fund web site, October 8, 2013.) Mind you, these estimates were much higher in July, but they have since been revised lower.
We all know how anemic the rate of growth of the U.S. economy really is. Not a lot has changed since the financial crisis other than the value of the stock market increasing and the balance sheet of banks becoming healthy. The average Joe still suffers, unemployment remains high, we have seen an influx of part-time jobs created, and the national debt continues to increase.
China, the second-biggest economic hub in the global economy, is struggling as well. The IMF expects the Chinese economy to increase only 7.6% in 2013 and slow down to 7.3% in 2014. What you need to know is that these growth rates are a little embarrassing for the Chinese economy when looking at the historical averages.
What about the eurozone? There are still troubles in the region. Time will tell if the eurozone is moving towards prosperity or not, but I have some serious doubts.
The global economy is very important to watch for those who are investing for the long term. Investors have to know that, due to technology and innovation, the U.S. is becoming very connected to other parts of the world. That means we are highly affected by any major development in the world, be it positive or negative.
Investors who have high exposure to the global economy in their portfolio should start to take some precautions. One step could be to evaluate which areas of the global economy they are mainly invested in, and if there are economic troubles brewing there. By doing this, they can make better decisions and reduce their portfolio risk.