Global Stock Markets: Long Hope, Short Reality

This is a big week for markets in terms of economic data. Yesterday we had a data dump of mammoth proportions and the data wasn’t very promising.

A glance, we saw Australian, Korean, Spanish, Italian, French, German, UK, and Brazilian Purchasing Managers Index (PMI) all print sub-50 (contractionary) numbers. US PMI fell to 52.5 and Chinese PMI fell to 50.2 (lowest in three years. In addition, Eurozone unemployment rose to a record 11.1%, Brazilian consumer default rates spiked higher, and the US Institute for Supply Management survey (ISM) came in at a contractionary 48.7 (another three year low).

OK, you get it. The data was bad yesterday, but markets still rallied? What can we learn from the market reaction?

Markets rallied for two reasons:
1) Bad data was expected (but maybe not this bad and all around the world at once).
2) Investors are buying in hopes of global central bank easing measures.

I don’t know about you, but these “hope” rallies don’t fill me with the warm feeling that the four-letter word denotes. I would much rather see “reality” rallies based on hard statistics.

These central bank fueled hope rallies are inherently irrational. Yes, I understand that markets are forward looking and are priced for what we can expect at least 1 year from now, but I also understand short-term market psychology. As soon as the ECB cuts rates and China lowers lending standards, then what are we left with to hope for? A really poor earnings season that will splash a tidal wave of artic fresh water in investor’s faces.

So what is reality?

European rates are at 1% and will probably be slashed to zero or near zero. This leaves the developed economies with zero rates across the board and very little flexibility for central banks in the west to stimulate without political coordination.

Asia has notably slowed across the board as our global factories have little end market demand to produce for. There will likely be some more Asian stimulus to look forward to, but it will be focused on Asian market consumption oriented growth as they look to cut dependence on the US and European economies.

North America seems to be the only major economic region that is not contracting, but it barely moving forward with sub 2% growth. If the rest of the global economy doesn’t get its act together soon, we will likely start contracting as well.

So what is a lowly investor to do?

I am keeping copious amounts of cash and sitting out this “hope” rally. While there is some interesting activity going on right now in health care, I would like to see global politics and central banks play their cards a little more before putting my cash to work.

There are some bright spots in the global economy. We are seeing a revolution in the tech industry which has changed the nature and location of computing. We are also seeing a tech revolution in the oil and gas industry. The best part about technological revolutions is that they will happen despite what the Institute for Supply Management survey says and are thus somewhat uncorrelated to macroeconomics.

In summation, invest in game changing innovative companies, invest in what is consistent (i.e. low beta plays, dividends), and where uncertain keep your cash close. Don’t follow the crowd into “hope” rallies. Stay sober with reality and you just might find some very attractive valuations after the hope rallies fade and reality drives assets prices back down.