Global Forecast: Synchronized Growth - So Long as Governments Behave

The economic climate is a bit sunnier than it should be, given the recent storms. Political turmoil in the U.S.; banking woes in Cyprus; chaos in Egypt and Syria; botched mid-year messaging on tapering from the U.S. Federal Reserve – we’ve seen no dearth of dire news. But equities continue to show gains, even setting some records. The U.S. large-cap Russell 1000® Index, for example, closed at a record high on Oct. 29, 2013 and reflects a year-to-date gain of 26.9% through Nov. 4, 2013.

So the inevitable question is: Will this continue? For the moment, I’m confident enough to answer yes – with some important reservations. I believe we’ll see a strengthening, low-inflation economic recovery across the major economies. In fact, I believe we’re likely to see simultaneous growth across the major developed economies – the U.S., Japan, and Europe – for the first time since 2010. Growth in China also shows positive signs, and exports are increasing in developing countries.

Our latest Strategist’s Outlook and Barometer favors equities over bonds despite the relatively high levels equities have hit. In the U.S., I see improving corporate earnings as their primary boost, as otherwise U.S. equities appear to be fully valued. European equities appear to have more upside, and I see continued recovery there, and slow growth in labor costs. Worldwide, our Russell Global Index returned 13.9 percent over the first nine months of 2013 – a significant return. That makes me hesitant to forecast a repeat. But given the generally positive state of the global economy, the path of least resistance is likely to be continued growth, even among emerging markets.

What gives me pause is the potential for governments to torpedo an otherwise positive outlook. It’s true that the U.S. muddled through its shutdown and debt-ceiling crisis, but the late-breaking deal that set things right only delayed another reckoning. Another debt-ceiling fight is possible in January, before the Feb. 7 deadline to increase the ceiling. Moreover, a Republican party chastened by the shutdown debacle may feel emboldened by recent problems with the Affordable Care Act roll-out, forcing another battle to the edge of the precipice.

Elsewhere, the Japanese government is pushing to increase that country’s consumption (VAT) tax from 5 percent to 8 percent in April. It’s a gamble, but Japan’s economy seems to have enough momentum to shrug off this rise, and successful implementation of an increase will help manage Japan’s debt. In Europe, the worry is that an Asset Quality Review in the banking sector, set for early 2014, may uncover capital shortfalls and lead to another existential mini-crisis for the Eurozone.

One other concern is that investors themselves may become overconfident, which could send equities too high and, in turn, precipitate a painful dive.

These are restive economic times. Despite being far enough into a growth cycle that history might suggest the potential for another recession, the global economy’s spare capacity and low inflation mean that we’re some distance away from policy changes that would unsettle markets. So long as governments act in their economies’ best interests, I believe the first half of 2014 should be moderately positive, even if agonizing along the way.

Disclosures:

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.

The Russell 1000® Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the U.S. market. The Russell 1000®Index is constructed to provide a comprehensive and unbiased barometer for the large-cap segment and is completely reconstituted annually to ensure new and growing equities are reflected.

The Russell Global Index measures the performance of the global equity market based on all investable equity securities. The index includes approximately 10,000 securities in 63 countries and covers 98% of the investable global market. All securities in the Russell Global Index are classified according to size, region, country, and sector, as a result the Index can be segmented into more than 300 distinct benchmarks.

Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.

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