Global manufacturing PMIs came out this week, and the results were a bit mixed. The US slowed to a still-strong 56.6—comfortably above 50, the magical dividing line between contraction and growth, but the UK, eurozone, China and much of Asia dwindled to just above or below that magic number. JP Morgan’s global manufacturing PMI slowed to 52.2, and headlines concluded we’re in a full-fledged global manufacturing slowdown. Which, to some, means a demand slowdown. Which they then extrapolate to an economic slowdown. Which is all, in our view, a bit tired after five-plus years of slowing-growth fears. Especially since slow PMI often doesn’t mean slow growth. But on the bright side, even if these fears do come true, stocks have proven they can do fine.
Contrary to what you’ll read most other places, stocks don’t need rip-roaring economic growth. They just need the likely reality over the next 12 to 18 months or so to exceed investors’ expectations. That’s it! This is how we’ve had a gangbusters global bull market during five and a half years of an overall meh global expansion that has endured its fair share of localized recessions. If investors broadly expect the world to grind to a halt, slow-go is a relieving surprise. This is plenty good enough for stocks.
Think about it. This US expansion has been the slowest since World War II—but the S&P 500 has annualized returns of 21.1% from its March 9, 2009 beginning to September 30, 2014. Which basically matches bull markets’ average annualized return of 21.2%.[i] If it stopped here (which we don’t think is likely), that annualized return would rank fifth among the 13 bull markets since 1932. World stocks’ annualized returns in this bull market are also roughly in line with their historical averages.[ii] Nothing unusual based on the supposedly sluggish world economy.
Global stocks have dealt with a host of economic troubles during that span. Before the UK’s results were revised up, folks thought Britain had a double-dip recession and verged on a triple dip between Q4 2011 and Q1 2013.[iii] Over the same time period, the eurozone had an 18-month recession, with GDP falling on a quarterly basis from Q4 2011 to Q1 2013.[iv] Yet, despite corrections, global stocks rose 34%.[v] Japan suffered a double dip recession, partly influenced by a 9.0 magnitude earthquake and devastating tsunami in March 2011. GDP fell from Q4 2010 through Q2 2011, rose the next three quarters, then slumped again for three quarters starting in Q2 2012 (a true triple-dip, counting 2008).Yet World stocks rose 19.2% over those two years.[vi]
Moreover, today’s weak spots aren’t a surprise—they’re the same weak spots the world has feared and global stocks have overcome for years now. Slowing Chinese factories? China’s industrial production has been overall slowing since 2010. Ditto for GDP. Folks have fretted weak PMIs there for well over two years. Yet China overall is still growing, and that’s plenty good enough to satisfy markets. A flatlining eurozone? Those concerns haven’t faded since the recession ended. The eurozone has been the epicenter of global fear for five years now. Sluggish uneven growth, compared to perpetually doom-like expectations, is a pleasant surprise for many investors.
The question for investors isn’t, “will growth slow?” That isn’t what matters. The question is whether reality beats expectations. From the media’s take on the PMI slowdown, it seems clear expectations broadly are in the doldrums. A very mild slowdown would probably be a welcome relief. But reality could be even better than that! PMIs are a nice, near real-time snapshot of activity, but they only tell you how many firms think they grew. They don’t tell you by how much. Plus, manufacturing is just a piece of the global economy—particularly for developed countries, which are largely service-based. UK manufacturing PMI, for example, has largely slowed for a year, yet GDP didn’t. China’s official manufacturing PMI has hovered around 50 for a year, and its private-firm focused HSBC gauge often contracted. But growth held up.
Factory slowdown or not, we suspect the world will be fine. With everything the global economy has thrown at stocks during this five and a half year bull market, a wee bit of a still-growthy soft patch would be sort of an improvement from the days of recessions in major regions. Investors might chew over sad-looking data as they did Wednesday, but stocks will have already moved on, the way they always do.
[i] Source: FactSet. Average annualized S&P 500 price level returns for the periods: 06/01/1932 – 03/06/1937; 04/28/1942 – 05/29/1946; 06/13/1949 – 08/02/1956; 10/22/1957 – 12/12/1961; 06/26/1962 – 02/09/1966; 10/07/1966 – 11/29/1968; 05/26/1970 – 01/11/1973; 10/03/1974 – 11/28/1980; 08/12/1982 – 08/25/1987; 12/04/1987 – 07/16/1990; 10/11/1990 – 03/24/2000; 10/09/2002 – 10/09/2007.
[ii] This is based on the MSCI World Index (Price Returns) and includes only six bull markets due to the index’s inception being 12/31/1969.
[iii] Source: FactSet, UK real q/q GDP for the period Q4 2011 – Q1 2013.
[iv] Source: FactSet, Eurozone real q/q GDP for the period Q4 2011 – Q1 2013.
[v] Source: FactSet, MSCI World Index returns including net dividends, 09/30/2011 – 03/31/2013.
[vi] Source: FactSet, Japan real q/q GDP for the period Q4 2010 – Q4 2012. MSCI World Index returns including net dividends, 09/30/2010 – 12/31/2012 (the span of GDP contraction).