What’s happening in the global economy?
JP Morgan Global Manufacturing PMI. Source: Bloomberg
It’s no secret that the US stock market is approaching record levels. Business news reports seem to be obsessed with the Dow’s flirtation with the 20,000 mark – which first neared about a month ago. But far more important than Disney or IBM’s price – stock prices, after all, determine the level of the Dow Jones Industrial Average – is the status of the global economy. And the world economy has been improving for about 6 months now.
European industrial production has started to pick up, the US and Canada are doing much better, now that oil prices have stabilized, and – most significantly – China’s economy has been improving. The US and China are by far the two largest economies in the world: the US has an $18 trillion economy, and China produces $11 trillion of goods and services annually. Together, they constitute about 40% of the world’s economy.
For lots of reasons, it’s hard to measure what’s going on in China. Chinese economic statistics can be questionable. But one thing that can be measured fairly reliably is electricity consumption: as an economy grows, it tends to use more. And China’s power consumption has been growing around 7% per year, versus a year ago, when there was no growth.
China Electricity Consumption, Year-over-year. Source: Bloomberg
As a result, I think we can expect that our current economic expansion isn’t going to just fade away. It’s not based on sentiment or hope, but solid global economic performance.
Investors should always be prepared for something unexpected. That’s why diversification is important. But as long as the economy grows, equities will have a tail-wind—as will probably keep breaking records.
Douglas R. Tengdin, CFA
Chief Investment Officer