December 26, 2018

“…the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror.” – FDR, 1933.

We are suffering through the sixth correction of 10% or more in the nearly-10-year history of this bull market. The last correction of this magnitude struck in January-February, 2016. The cause of that correction (as this) was fear of a global slowdown. Some of the headlines of that time were:

“World Bank Downgrades Global Growth in 2016” (UN News, January 5, 2016)
“5 Reasons the IMF Says Global Economic Growth is Slowing” (NPR, April 12, 2016)
“These 9 Charts Explain the Global Economic Slowdown” (Forbes, May 6, 2016)
“World Economic Growth is Slowing” (The Economist, May 19, 2016)
“We’re in a Low-Growth World. How Did We Get Here?” (New York Times, August 6, 2016).

What happened next? The world never stopped growing. Suddenly, stories of a global growth slowdown were replaced by stories of “coordinated global growth” in 2017. Every nation among the top 50 covered by The Economist each week (except Venezuela) was growing, and the growth rate surged from 3.2% in 2016 to 3.7% in 2017. The chart below (published in early 2018) shows real numbers for 2012-16 and projected through 2022, showing 2016 to be a low-water mark for the decade and no real “slowdown.”

With the magic of compound interest, if the world actually grows as fast as the IMF projected earlier this year, the global GDP would be 48% greater in real terms (adjusted for inflation) in 2023 than in 2012.

But now, with renewed concerns for another “global growth slowdown” arising in late 2018, the IMF has lowered its forward projections for 2018 and 2019 growth from 3.94% to 3.7%, but that’s hardly a slowdown when compared to 2016 or even 2017. It’s the same fairly-rapid 3.7% annual growth rate.

A world growing 3.7% each year doubles its output every 19 years. Anyone want to complain about that?

Look at the top-line growth rate for the whole world – Christmas past, Christmas present, and Christmas future. Only a Scrooge would look at those numbers and call consistent 3.7% growth a “slowdown.”

The formerly poor countries of Asia continue to lead the pack. From this point of the view, the poorest of the world are getting richer faster than the richer nations are accumulating more wealth. In this way, the global “wealth gap” is being rapidly closed, even if it is not being closed in each specific rich nation.

Fastest Growth Rates in 2019
India  7.4%
China  6.2%
ASEAN-5  5.2% (Indonesia, Malaysia, the Philippines, Singapore and Thailand)
Low-Income  5.2% (Formerly called “Developing Countries”)
Source: IMF, World Economic Outlook, October 2018

Meanwhile, the slowest growth rates are still positive, not negative, so there are no recessions, anywhere:

Slowest Growth rates in 2019
Japan  +0.9%
Italy  +1.0%
South Africa  +1.4%
U.K.  +1.5%
France  +1.6%
Source: IMF, World Economic Outlook, October 2018

There’s been a lot of talk about a Eurozone recession, but you’ll notice all those slow-growth numbers have a plus-sign preceding them – no recession in sight. Recently, ECB President Mario Draghi cut growth forecasts for the Eurozone by just 0.1% to 1.9% in 2018, down from 2.0% in September. Also, estimates for 2019 GDP growth were revised to 1.7% from 1.8%. That’s just a SINGLE TENTH lower.

Is the Market Really Fearing a “Great Earnings Slowdown”?

More likely than a GDP slump, the market may fear an earnings slowdown in 2019. That’s only natural after a year with a 23%+ projected earnings gain for the S&P 500, reflecting the first year of the corporate tax-rate reduction, but projected earnings growth rates for 2019 and 2020 are still 8%+ and 10%+. Ed Yardeni wrote last week that the 2019 earnings estimates are now +8.3%, and 2020 estimates are +10.4%.

Yardeni adds that “the growth rate for Q4-2018 has been reduced from 18.2% at the end of September to 14.5% currently. That’s not unusual. They often do so only to find that the earnings season was better than their downwardly revised estimates.”

Another overblown worry is the supposed decline in capital spending because businesses are “spending all their tax windfall on share buybacks.” Partly true, in that share buybacks may reach $1 trillion this year, but capital spending may reach $3 trillion and is growing just as fast. As Yardeni wrote last Tuesday (in “The True Story: Capital Spending at Record High”), nominal capital spending rose to a record high of $2.8 trillion (saar) during Q3-2018. Over the past year through Q2-2018, S&P 500 buybacks totaled $646 billion. That’s a lot, but it wasn’t enough to slow capital spending.” He charted the two together:

The market is terribly worried about something – maybe Fed policy or the government closing down. Whatever it is, scared investors are creating the worst December since 1931 (so far), and the worst fourth quarter since at least 2008 (we’ll have the final post-mortem next week). Maybe we desperately need to worry about something, no matter how good the statistical realities look. Perhaps investors would rather be worried, but I believe that the vast bulk of the world will continue to work hard and keep growing.

About The Author

Gary Alexander

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. *All content of “Growth Mail” represents the opinion of Gary Alexander*


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