Daily Gains Letter

Why I Won’t Be Surprised If the Global Economy Caves

By for Daily Gains Letter |

Global Economy CavesThe global economy looks to be in trouble, as there may be an economic contraction on the horizon. If all the pieces of the puzzle fall into place, companies on key stock indices might face issues in delivering corporate earnings.

Major economic hubs in the global economy are witnessing an economic slowdown. Those economies aren’t marching ahead, and their growth rates seem to be stagnant. If this continues, then it wouldn’t be a surprise to eventually see the global economy cave in, resulting in a global economic slowdown.

The eurozone, one of the biggest economic hubs in the global economy, remains under severe scrutiny. In the third quarter, the gross domestic product (GDP) growth rate for the common currency region declined to 0.1%, while in the second quarter, the GDP growth rate was 0.3%. (Source: “Second estimate for the third quarter of 2013,” Eurostat web site, December 4, 2013.)

The troubled countries in the eurozone, including Greece, Spain, and Portugal, are stuck in depression-like conditions, but major countries in the region also face economic pressures. For example, Germany’s third-quarter GDP growth rate came in at 0.3% compared to the second quarter, which saw 0.7% GDP growth from the previous quarter. (Source: Ibid.)

Australia, another major economic hub in the global economy, is facing headwinds as well. In the third quarter, the Australian economy grew by only 0.6% from the previous quarter. The annual GDP growth rate of Australia registered at 2.3%. In the second quarter, the Australian economy grew 0.7% and the annual growth rate was 2.4%. (Source: Kewk, G., “Australia’s economic growth falling short,” The Sydney Morning Herald web site, December 4, 2013.)

Japan, the third-biggest economy in the world, continues to suffer despite the unprecedented measures taken by the government and central bank of that country to fight the economic slowdown and spur growth. Japan’s GDP growth rate was 0.9% in the second quarter and 0.5% in the third. (Source: Kajimoto, T. and White, S., “Japan third quarter GDP slows, consumption expected to pick up again,” Reuters web site, November 4, 2013.)

Why should the global economy matter to investors?

If the global economy faces headwinds, companies on the key stock indices will see their sales and profits decline. Consider this: in 2012, 46.6% of all the sales of the S&P 500 companies that report their global sales came from outside of the U.S. economy—their reliance on the global economy has slightly increased. In 2011, this number was 46.1%, and in 2010, it was 46.3%. (Source: “S&P 500 2012: Global Sales,” S&P Dow Jones Indices web site, August 2013.)

Many people tend to forget that companies that trade on key stock indices heavily rely on the global economy, so any fluctuation in global demand will affect them. Investors can profit form this situation by looking at an exchange-traded fund (ETF) like the ProShares Short MSCI EAFE (NYSEArca/EFZ). This ETF essentially lets investors profit as global stocks decline in value.

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