It is interesting, as media reports suggest, that markets have done so well this year even as concerns over a global economic slowdown have intensified. Even more interesting is that media discussion of the rally interprets it from an entirely different perspective than it employed when it interpreted the market retreat during the fourth quarter of 2018. Then, the economy seemed to be doing reasonably well. Media commentary took the decline in stock prices as a sign that an economic slowdown was coming. But now, with stock prices up, the media says nothing about it as a sign of an economic pickup. Rather, it expresses bewilderment about market strength in the face of economic weakness. Could it be, as the media treatments seem to imply, that the market was forward-looking last year but this year has abandoned that practice? That inconsistency seems unlikely. The market is always forward looking. Isn’t it more likely that, contrary to the media’s treatment, the market has maintained a consistent perspective and that this year’s rally is forecasting a pickup in economic fortunes later this year?
In an earlier post, I explained the inherent pitfalls in how the media discusses economic and financial events. This latest inconsistency should illustrate some of the points I made earlier. Though I can’t know what will happen or even whether the rally will last (nor can anyone else), here are three interpretations that might explain recent events in a less mysterious manner than they have received in the media:
- The slowdown reported in the media is hardly the stuff to significantly sway investors’ perceptions of the future. The media referred to comments from the Federal Reserve (Fed) and the International Monetary Fund (IMF) about downgrading their forecasts for economic growth in the coming quarters. The Fed relied mostly on language rather than on statistics and it made no mention of recession or abrupt economic developments. The IMF announced it had lowered its 2019 forecast of global economic growth to 3.3 percent from 3.5 percent that it made last January and from 3.7 percent it made last October. These revised forecasts, while definitely on the downside, are well within the usual error attached to forecasts.
- The timing of these downgrades in global economic fortunes also seems significant. The Fed made its comments during the market retreat last year. In fact, many media reports referenced the Fed’s more cautious outlook as reason for the market’s retreat. The IMF made most of its downgraded revision during the month of December. It is likely that the market –– always forward looking –– adjusted prices to a less robust 2019 in reaction to those forecasts made in 2018’s final quarter. So, having already adjusted prices down to account for the economic slowdown, the market would hardly need to do so again as the outlook to which it had already adjusted itself became a reality.
- It is more likely the market has continued to look forward and now expects forecast upgrades. Indeed, recent weeks have brought news of upturns from areas as disparate as the American consumer and China’s industrial output, not a boom in either case, but an improvement over how the situation looked at the end of 2018. Japan remains stagnant and so does most of Europe, but this is hardly a change from the world to which market prices had already adjusted when they fell late last year. Now that the market has priced valuations into reasonable ranges with last year’s adjustment, it has built on this limited positive news by pushing prices upward.
Though these explanations may not exhaust all interpretations of recent events, they do treat the retreat of late 2018 and the rally of early 2019 consistently, which is more than the media treatment has done. Keep in mind that because the rally has already responded to the news of some economic improvement, the ever-forward-looking market will need to see additional economic improvement to sustain its upward momentum.