How Slowing Global Growth Affects Investors

April 22, 2019

As we approach the tenth anniversary of the end of the global financial crisis, it shouldn't be a surprise that global growth has begun to slow. While the economies of many countries are still healthy, especially here in the U.S., growth will not be as robust when compared to the past two years. This has many implications for investors including impacts on corporate earnings, stock valuations and expected portfolio returns.

For long-term investors, this is not only expected, but is an inevitable stage of the global business cycle. Holding diversified portfolios and having long-term financial plans that can weather all phases of the cycle is a basic investment principle for those investing over the course of decades. This is true whether the economy is speeding up or slowing down.

Growth has decelerated in many regions when compared to lofty expectations two years ago. In 2017, the world was experiencing what many referred to as coordinated/synchronized global growth. The global economic engine was firing on all cylinders - even in Europe, with on-going Brexit concerns, and in Emerging Markets, whose economies have grown in fits and starts. China, especially, shook off concerns of a so-called "hard landing" as its economy decelerates from its historical double-digit growth rates.

Today, the story is mixed. The U.S. economy is still quite healthy with unemployment and jobless claims at 50-year lows. However, growth is expected to be slower than last year when factors such as tax reform boosted spending.

Europe is still in a difficult position as Brexit continues to linger and slower global growth takes its toll. Many European government yields are still in negative territory and the European Central Bank is considering more aggressive stimulus.

Growth in China recently beat expectations as a result of such stimulus. But even with a better-than-expected 6.4% GDP growth, there will continue to be concerns about the strength of manufacturing and its debt levels.

There is never a perfect environment for investors. Instead, it's important to maintain a well-balanced portfolio that can withstand all of these economic and market concerns. This will be increasingly important in the later stages of the global business cycle. Below are three charts that illustrate these points.

1. Global economic growth has decelerated


Global growth has slowed over the past year. This is partly due to the spectacular growth rates experienced in 2017 and part of 2018 when most economies were in overdrive. This is also due to economic uncertainties such as U.S.-China trade talks and Brexit.

Still, even if it's slowing, it's important to remember that growth is still positive and healthy. In this environment, investors can still experience solid returns with well-diversified portfolios. This is especially true as these facts become priced into market expectations.

2. There have been negative surprises in the economic data


Not only have actual growth numbers decelerated, but the economic data in the U.S. and globally have surprised to the downside as well. U.S. data, from retail sales to payrolls, have seen occasional dips in recent months.

For long-term investors, it's important to remember that these data can fluctuate significantly over short periods of time. The chart above illustrates this - there have been wild swings in economic surprises over the past several years, despite solid investment returns. Thus, it's important to stay disciplined and patient, and not react to every headline.

3. Earnings are expected to grow more slowly as a result


The direct consequence of slowing global growth is a deceleration in corporate earnings. Last year, earnings grew by well over 20%. This year, earnings are now expected to grow by only 3.3%.

However, Wall Street consensus estimates still expect this to rebound in 2020 and 2021. While these are slower rates that in prior years, they can still support long-term portfolio returns.

The bottom line for investors? Global growth is decelerating, but this is expected ten years after the financial crisis. Investors who can stay disciplined, patient, and well-diversified can still be positioned to achieve their long-term goals.