Understanding booming markets in the context of slowing economies

It might be a little more than confusing to see that some of the largest markets in the world are currently in the growth phase, while the economies around the world are seeing a slowdown that has not been seen in a decade. The confusion is justifiably understandable, as it makes no sense why the markets would seem as healthy as they are if the global economies are showing that they are only struggling to support any kind of growth. It seems like the market participants are seeing reasons to be optimistic about the near future, but what is there to be excited about? 

Consumer spending is down

The USA, China and Europe are all reporting the same thing - consumer spending seems to be going down. The everyday people are seemingly spending less money on goods that they might have enjoyed more in the past. The consumers are buying fewer cars, fewer services and are simply doing what they can to save the money they can. This has been affecting the performance of the economies, which has been seen as a sign that a recession might be nearing. So much so that the policymakers of these countries are looking at slashing the rates, with the Federal Reserve announcing recently that they are already planning on doing it and the EU starting to consider the action as well. According to Tony Dwyer, the slashing rates would be a healthy choice for the current state of the economy, as it would allow for the slowing growth of the economy to be “kickstarted” into growth. 

But is it enough?

The question is on everybody’s minds. The slowing growth and the lack of spending seem to be growing further into 2019 we advance. While slashing the rates might be a good idea, will it produce the desired effect that the markets are currently betting on, allowing the economy to continue growing, unabated? 

Fred Pedersen, the head of sales at YourBourse and founder of NowEscape does not think so. “The markets are currently a little overly optimistic about what is going to be coming in the near future. More action needs to be taken in order to help. Slashing the rates once might be a good idea, but it will not stop the advancing tide of economic issues that are on the horizon. Several quarter-point slashes might be necessary over the period of the next few months, but also an attempt needs to be made to encourage people to actually buy things. There is only one way to do so: let the prices to drop and that is only possible if the trade wards that the world is currently going for, abate even just a little. Tariffs are killing consumption, making everything much more expensive than it should be, which is stopping people from buying at the same level as they were in the past”

So why are the markets going strong?

This is where the answer might be a little complicated. It looks like the markets in Australia, EU and even the US have been doing great over the past few weeks. While there have been certain falls in the past few days as Trump made certain announcements regarding the trade was, the overall attitude has been positive, until now. The until now part is key in defining what is happening. The recent corporate tax rate cuts in the US, combined with highly productive 2018, have allowed the companies stocks to keep growing, or at least a certain subset of the market. The cuts allowed for an increase in revenue for all of the companies. Higher revenues mean better shareholder attitudes and better share value. The growth of the stock market has thus, in some sense, been driven by steam. In the case of the US, but what about the rest of the world? It seems that the world markets like to follow the US markets whenever market attitude is discussed. But it seems like the steam is running out. 

The markets have seen some slowing the past few days, and they will only be seeing more slowing in the coming days as trade wars continue to be waged and consumer spending remains low. The companies and the policymakers in the US understand this much, which is why they are now considering additional tax cuts as a way to stimulate the markets. While this might be a solution temporarily, it would mean a lot of issues for the US revenue and it would also be very short term, with the markets remaining healthy for a much shorter time this time, as the rest of the economy struggles to keep up.