That’s the message we heard loud and clear from the markets this week. As economies and markets around the world wobble to start the new year, they were looking to central banks to bail them out. Mario Draghi gave markets around the world some solace with his dovish news conference yesterday.
Our hope, along with many others, would be that seven years into this economic expansion, central bankers would no longer be bailing out the capital markets with aggressive monetary policy. It appears to still be a necessary strategy in many parts of the world. Whether or not this has a lasting effect remains to be seen.
Slow-growing emerging markets continue to drag down overall growth in developed markets. Emerging markets also continue to export deflation into developed markets, which allows central banks around the world to continue with simulative policies. Expectations are now such that Japan will also expand their monetary program and that our own Fed will raise rates at an even slower pace. This support is clearly vital for what is a slow growth global economy.
Draghis’s press conference had a very positive effect on markets. Stocks and oil rallied from much oversold levels. When you’re moving through a sell-off that is overdone, it is often unclear what will be the catalyst for the turn. But inevitably, something happens to cause short-sellers to cover their positions. The president of the European Central Bank provided that catalyst.
Here is the real question after a week like this: “Is global growth strong enough to avoid recession in 2016?” Our answer is yes. We believe growth in the UK, Eurozone and U.S. are enough to maintain 3.5 percent GDP growth globally in 2016. We include a slowing, but not crashing, Chinese economy in that forecast.
At the beginning of 2015, we called for more volatile equity markets with lower return expectations. Our positive return expectations at that time were based on continued liquidity support from central banks around the world. 2016 looks very much the same to us.
Our Takeaways for the Week:
- After the massive sell-off we saw intraday on Wednesday, the S&P 500 rallied to finish the week up 1.4 percent, thanks to comments from Mario Draghi
- Continued upward momentum in stock prices will depend heavily on fourth quarter earnings reports and positive economic data