The stock market recovery appears to have resumed, and investors are beginning to take notice. Sentiment seems to have changed almost overnight, from “fear of market participation” to “fear of missing out.” All major US stock indexes (Dow, S&P, Nasdaq) have made all-time highs. Even the persistently lagging Canadian index (TSX) has sprung to new highs. In our previous blog entry, entitled: Haunt-ober: a spooky start to Q4, we detailed a number of factors that indicated that the market fundamentals were actually stronger than what the volatility had been reflecting. Over the last six weeks, the bulls seem to have taken control, justifying their buying with the very same positive fundamentals we laid out.

As portfolio managers, part of our job is to play devil’s advocate with our own theories. Rather than finding more self-supporting research, we aim to push ourselves by questioning whether or not we could be wrong. This exercise is usually quite humbling, and enables us to invest with a more level-headed approach. So, in that spirit, this blog entry is for the “bulls” out there. Let’s challenge their outlook by looking at some factors that may have not yet been considered.

With the US Fed no longer suggesting a series of rate hikes, bearish investors have focused more on the ongoing trade war between the US and China. A delay in signing Phase 1 of the trade agreement, defying agreed-upon terms, or reigniting tensions through hostile rhetoric are all reasonable to expect on both sides. Currently, the market expects that Phase 1 of the trade deal will be signed before year’s end. Hence, any setbacks may offer just the kind of excuse that the market has been waiting for, to sell and take some profits.

Additionally, although the “bulls” feel confident about the health of the US consumer and economy, a bearish case can be made that the strength of the US alone is no longer the most significant variable in determining the likelihood of a recession. The chart below shows the IMF 2019 forecast for each region’s contribution to global GDP growth. Readers can see that the US contributes only 11% of Global GDP Growth, whereas Asian economies account for 63% of the growth mix.

Source: IMF, Standard Chartered (VisualCapitalist.com)

 

As for the actual share in GDP size, the prominence of the US has also declined. Back in 1980, the US and EU accounted for more than half of the global economy, whereas today their combined share is only 31%.

Source: IMF, Standard Chartered (VisualCapitalist.com)

 

This all points to the possibility that, despite the strength of the US consumer, it is fathomable that the next major global recession will be caused by slowdowns from regions outside of North America as they now have much more influence than in the past.

Investors would be misguided to simply focus on the US consumer and economy alone. Rather, more weight should be placed on global economic indicators. As it stands, some indicators are not showing such robust signals of growth.

The exercise of looking for evidence contrary to your original view is a worthwhile one. Currently, the political environment and wider global economic outlook provides uncertainty. With that said, investors are becoming more realistic, and have come to expect that trade negotiations will be riddled with hiccups that feel like “one step forward and two steps back.” This leads to an investor that is less inclined to press the sell button at the first signs of conflict. Moreover, although global growth appears to be waning, the pace of decline seems to be slowing down, perhaps signaling that a trough in negativity has been set. Whatever may be the case, investors should account for these variables, in order to maintain a balanced perspective, and avoid extreme surprises. We recommend that investors review their portfolios with their advisors to determine whether a rebalance is necessary.