Bullish investors looking to vindicate the stock market’s V-shaped recovery from its December lows can take comfort in signs the biggest drivers of global economic weakness are in the rearview mirror.
But it might still be too early to sound the all-clear signal, according to one economist.
China tops the list of abating worries, said Gabriel Sterne, head of global macro research at Oxford Economics, in a Wednesday note, with the government’s stimulus efforts showing signs of boosting lending alongside other signs of optimism. Signs of economic stability in the eurozone, fading worries over trade spats and a global stock market recovery are among other comforting developments.
Also see: Don’t look now, but global economic data are starting to surprise investors in a good way
“It may be premature to declare the onset of happy days for the global economy, but our trawl through the various drivers of weakness over the last year or so suggests the worst is behind us,” Sterne wrote.
Those themes are among the factors that stock-market bulls have run with as global equities have surged in 2019, bouncing back from a late-2018 selloff sparked by fears of an overly aggressive Federal Reserve and downbeat global economic data. The S&P 500 SPX, -0.39% is up around 13% so far this year and around 20% from its Christmas Eve low, trading within striking distance of its all-time high set last September.
A dovish turnabout by the Federal Reserve in January has been credited with helping to soothe investor worries over tightening financial conditions, while stimulus efforts by Chinese policy makers also spurred optimism.
Check out: Why stock markets across the globe are rallying at the same time
Skeptics, however, argue that the rebound is overdone and contend that recession fears are likely to return later this year or early 2020.
Read: Bulls looking for repeat of 2016 stock-market rally will be disappointed: Morgan Stanley
Also see: Why stocks can continue to rally in short term after investors suffered ‘parable of the boiling frog’
Sterne broke down some of the biggest factors in the color-coded chart below:
Oxford Economics
“Plenty of 2018’s bad news was interconnected and centered around adverse global financial conditions, U.S. dollar strength and very tough external conditions for [emerging markets],” Sterne said. “These have reversed in the Q1 2019 amid receding fears that global inflation is set to surge.”
But the graphic also illustrates why Sterne said he’s “not yet proclaiming hello to blue skies.”
First, recent shocks, whether good or bad, would be expected to fade over time. The context remains one of weakening trend growth and pockets of weakness in global balance sheets, including in China, he noted. And there are still three potential negative drivers for the global economy, including the fading impact from tax-cut-related fiscal boost from the U.S.; the small chance that some of the “ongoing negatives,” such as the U.S.-China trade conflict, could turn into something “very nasty; and the possibility that negative momentum from past and continuing shocks could lead to weakness in the second quarter and beyond.
Downbeat results late Tuesday from logistics company FedEx Corp. FDX, -5.02% often viewed as a bellwether for global economic activity, could serve to underline those concerns. The company’s chief financial officer, Alan Graf, warned that “slowing international macroeconomic conditions and weaker global trade growth trends continue, as seen in the year-over-year decline in our FedEx Express international revenue.”
On the plus side, Chief Executive Fred Smith told CNBC that there were some “green shoots” to be found, but warned that much would depend on a solution to the U.K.’s Brexit-related struggles and some sort of resolution to the U.S.-China trade dispute. FedEx shares were off 4.7%.
Read: FedEx just fired off a warning investors may not be able to ignore
Caveats noted, Sterne said the shifting data picture points to a probable recovery in the second half of the year. Oxford Economics recently cut its global economic forecast, calling for world gross domestic product to slow to 2.5% in 2019 from 3% last year. Activity is likely to gain steam in the second half of this year as monetary and fiscal policy measures support underlying growths and storm clouds continue to dissipate, he said, with non-China emerging markets likely to lead the global recovery.
Want news about Europe delivered to your inbox? Subscribe to MarketWatch's free Europe Daily newsletter. Sign up here.
