European Recession? Look to Asia.

According to Fisher Investments analyst Brad Pyles (read more of his work here):

The European Union (27 countries including the UK ) represents roughly 26% of global GDP. This is similar to Asia at the end of 1997. As Asia went through its own solvency crisis (better known as the Asian Contagion), its GDP fell -0.6% in 1998 (see table below). While this caused Asia to underperform, it did not cause a global bear market. Furthermore, when you exclude China (whose GDP dropped near a two decade low but remained above 7% y/y), Asia’s GDP dropped -1.9% in 1998 while composing a slightly smaller percentage of global GDP than the current EU, but still a larger portion of global GDP than the current EMU.

This appears to show that a large portion of the global economy can modestly go negative for an extended period of time without causing a bear market, provided the global financial system remains intact and the rest of the world continues to grow. Consider that even the large 1998 correction did not occur until the Asian Contagion’s secondary effects took down Long Term Capital Management and threatened the global financial system.

Presented by Fisher Investments: Asia GDP vs. EU GDP from 1994-2010

 

Would a Euro Recession Sink the US Too?

With much hubbub about what a European recession might do to the US , particularly since exports are a significant portion of the economy, the analysts at Fisher Investments took a peek at US export exposure to the region (see below).

It’s pretty clear that—while there of course would be additional knock on effects to a recession in a region as big as the eurozone—the US is not headed for automatic economic doom as a result of its trade there. As of June, US exports to Italy were a little over 1% of total exports; Spain is even less, coming in at roughly 0.7% of total exports; even Germany (the healthiest of the bunch) is well under 4%.

Presented by Fisher Investments: US Exports to European Nations as a % of Total Exports

RealClearMarkets.com Editorial

Check out my editorial on www.realclearmarkets.com, “The Economy Can Weather a Euro Storm”.

Have a great Thanksgiving weekend!

LEI is Telling the Tale

US Leading Economic Indicators rose sharply, well more than expected in October. Why’s that important? Remember, just a few weeks ago, how recession not only seemed a foregone conclusion, but some experts even believed we were already in one? Through history, LEI generally needs to turn significantly negative in order to get a recession. That’s not where we are today.

Graphic from Fisher Investments - Leading Economic Indicators Index - US

US Retail Sales – A New All-Time High

Some simple facts:

• October US Retail sales rose +0.5% m/m (+7.2% y/y) vs. expected +0.3% m/m
  • Retail ex-autos rose +0.6% m/m (+7.3% y/y) vs. expected +0.2% m/m
  • Retail ex-autos & gas rose +0.7% m/m (+6.1% y/y) vs. expected +0.2% m/m

We’re way into this expansion—long enough that we’ve had a full on (and typical) mid-cycle slowdown—and real US GDP along with US retail sales are at all-time highs. The recent retail sales gains are broad-based: increased electronics store sales (+3.7% m/m), internet retail (non-store retail +1.5% m/m), sporting goods, hobby, book & music stores also posted a strong gain (+1.3% m/m). All of this led to an acceleration of core (ex-autos & gas) retail and a solid reading for headline growth following a sharp jump from an auto rebound in September.

We’re past the point where economists can easily claim the unemployment rate will “one day” sink the economy. These things are sometimes slow to move, but indications so far are that the world is moving on to new highs.

 

US Retail Sales reach new high - graphic presented by Fisher Investments

 

 

Fisher Investments’ Latest Stock Market Outlook

For a cogent synopsis on the current market environment, check out Fisher Investments’ newest Stock Market Outlook. Click here.

Stocks and GDP Aren’t the Same

 

Remember, stock investors should care greatly about the overall direction of the economy. But economic growth as measured by GDP is different than investing in the future profits of a company.

 

•  S&P 500 Showing Record Sales Clashes With Slower Growth Rate
• Capital Spending Nears 2008 Level as U.S. Skates New Recession

 

This blog has made this point often, but it can’t be repeated enough.

 

Is a Euro Break-Up Priced In?

I’m not a fully-fledged contrarian, and never have been. But smart investors must constantly ask themselves what’s already reflected in market prices. Because, if the thing you fear is already reflected in prices, that leaves a lot of room for upside surprise. A year ago, a euro breakup seemed impossible. Now it’s…inevitable? You be the judge:

Bogus Bailout: Why Europe Isn’t Off the Hook – Charlie Gasparino, NY Post

The Euro Zone Needs A Bigger Bazooka – Jason O’Mahony, MarketWatch

Survival Of The Euro Depends On France – Michael Sivy, Moneyland

Euro Crisis: Doubting ‘Domino’ Effect – Edward Lazear, Wall Street Journal

Achilles’ Heel of the Eurozone – Dimitri Papadimitriou, Los Angeles Times

Why We Can’t Escape the Eurocrisis – Gerald O’Driscoll, Wall Street Journal

Europe’s Doomed, Doomed I Say – Felix Salmon, Reuters

Is Greece Just Bluffing to Get a Better Deal? – Cyrus Sanati, Fortune

What Will China Demand to Save the Euro? – William Pesek, Bloomberg

The Mysterious, Gravity Defying Euro – Kenneth Rogoff, Project Syndicate