Volatility is back in equity markets today and headlines point to slowing economic growth across the globe. First, the market is a discounter of known information. If you understand that, you know GDP revisions by analysts and the same old stories about high unemployment don’t move stocks. Second, volatility is normal; it’s why stocks earn a premium over other asset classes over time. But guessing why stocks do what they do any given day is best left to fortune tellers. Let’s take our eyes off today’s bleeding ticker and focus on economic data from the World Bank and IMF.
Apparently European economic growth slowing may be contagious to the rest of the world. The 27 nations of the European Union (EU) are no poster child for growth and haven’t been for a very long time. 2001-2010 EU real GDP growth was a “massive” 1.18% on average. The trend doesn’t look good when you look at prior decades: 2.14% on average during the 1990s, 2.38% during the 1980s and 3.03% during the 1970s. To provide some perspective, Asia ex-Japan and Emerging Markets GDP expanded 7.06% and 5.75% 2001-2010, respectively. The US posted consistent showings in the low 3% range during the 70s, 80s and 90s. US real GDP grew just 1.64% on average 2001-2010.
Economies can slow during expansions just like a stock can take a step back before heading to new highs. Worries over the European Union’s economy are not new and add little credibility to global recession/depression fears. Equity investors should build portfolios with powerful global exporters in mind. This will help minimize exposure to structurally slowing economies and maximize exposure to the new engines of economic growth.