KINGSTON, NY, 23 JANUARY 2019—Up until yesterday, after three straight weeks of market gains in the new year, Wall Street had erased nearly all of its 2018 losses while Emerging Market equities rose for a fourth week straight.
This despite headline business news over the past three weeks that "Eurozone Will See Slower Economic Growth," "Sharp German Falloff Fans Global Fears," "World Bank warns of 'storm clouds' over global economy," "Recession Tops CEO Fears," …seldom was heard a discouraging word that a weakening global economy would slow down the equity bounce.
In fact, the word on The Street was the opposite.
"Stocks Rise as Fears Subside," blared the January 19-20, front page Wall Street Journal headline: "U.S. Stocks climbed Friday to notch their fourth consecutive week of gains as fears of an economic slowdown that gripped markets in December seem to have subsided."
And on Monday, even after China reported its economic growth cooled slightly in the fourth quarter as expected, registering a 6.6 percent growth rate for 2018, the weakest in 28 years, nearly all the Asia-Pacific markets closed higher.
WHAT A DIFFERENCE A DAY MAKES
Yet on Tuesday it was a totally different story. Equity markets across the globe moved sharply lower. Why? "Dow snaps 4-day winning streak as fears of an economic slowdown intensify." —CNBC.
TREND FORECAST: In the absence of aggressive government and central bank measures the global economic slowdown will escalate and equities will move sharply lower.
Therefore, in the U.S., despite solid corporate earnings and stronger than expected December jobs report, Federal Reserve's Chairman Jerome Powell said the Fed was "prepared to adjust policy quickly and flexibly."
On cue, European Central Bank President Mario Draghi said, "There is no room for complacency" and a "significant amount of monetary-policy stimulus is still needed."
So too with China whose central bank injected $83 billion into the banking system to stimulate the economy last Wednesday, the highest ever recorded in a single day. Then, following Monday's weak GDP numbers, today the government announced they'd step up fiscal spending and cut taxes and fees for small firms.
Depending on financial resources and monetary conditions, we forecast governments will expand fiscal spending and central banks will inject more monetary methadone into the cheap-money-addicted corporate and equity market addicts by lowering interest rates and/or new rounds of Quantitative Easing.
While temporarily boosting equities and economies, these measures will further inflate the $250 trillion global debt bubble, thus boosting demand for safe-haven assets such as gold.