Growth is the mantra that drives sentiment on Wall Street. The increased profits and dividends investors are seeking to drive stock prices stem from economic growth, which appears set to pick up on a global basis in 2014.
However, worldwide GDP is expected to have slowed in 2013, according to the International Monetary Fund (IMF), partly owing to somewhat softer data in the United States, plus a less robust rate of expansion in emerging markets, notably China.
Looking forward, it is a given that a lot needs to go right in the eurozone, the United States, China, and Japan, which account for nearly two-thirds of the world’s $72 trillion economy.
In the euro zone, clearly, indications that the year-and-a-half long recession ended in the second quarter with a 0.3% GDP reading hold sizable promise for better things to come. Truthfully, even what is shaping up as a weak recovery of around 1.0% GDP growth in 2014 would be a major improvement for the euro zone. But since the region is the world’s largest economic block, it is important that it at least not be a negative.
Stateside, there is a chance that momentum will build, assuming the recent partial government shutdown did not do too much damage, and won’t be a recurring event. A 2.5%-3.0% GDP advance is not out of the question next year, following 2013’s likely near-2.0% GDP increase. The Federal Reserve will presumably keep its bond-buying program going a while longer after the disruption to the economy caused by the government shutdown, and is not likely to raise interest rates until at least 2015.
Curiously, even the hint earlier this year that the Fed would be dialing down its massive stimulus program caused stock markets in a number of emerging nations to stumble. That was on the fear that rising interest rates would hamper growth and that returns from less risky venues would pick up.
Speaking of emerging markets, in China, the GDP pacesetter over the past ten years, growth appears set to moderate further, to the 7.0%-7.5% range in 2014. That nation’s leaders appear willing to settle for less vigorous--although still enviable--growth, in order to keep inflation at bay, and keep its expansion going. Elsewhere, some of the most prominent up-and-coming countries, including India, Brazil, and Russia, which account for about 8.5% of global GDP, offer more mixed prospects than in recent years.
Meantime, Japan’s awakening from its long slumber has been good to see, although it is not clear if the economy there will continue to benefit from the depreciation of its currency, the yen. The yen has fallen more than 20% versus the dollar in the past year, benefiting Japan’s exports.
Overall, prospects for a turnaround in the eurozone and a more rapid pace of recovery in the United States provide room for optimism in the coming months. We say recovery because the effects of the 2008 financial crisis are still lingering in the form of slower-than-normal overall growth, owing to relatively high unemployment and tighter credit conditions. Aggressive stimulus measures by the Federal Reserve also indicate that we are not fully past the difficult times. Slowdowns sometimes persist for long periods, such as the retrenchment caused by the oil shocks of the 1970s, which hampered the global economy into the early Eighties. The gradual return to health in recent years is reminiscent of that protracted comeback.
For investors, if the anticipated pickup in growth materializes as expected, this would be a good time to consider taking positions in cyclical stocks with the potential to produce healthy long-term total returns. Shares of companies, such as Caterpillar (CAT - Free Caterpillar Stock Report), Dupont (DD - Free Dupont Stock Report), Schlumberger (SLB), Chevron (CVX - Free Chevron Stock Report), and Exxon Mobil (XOM - Free Exxon Mobil Stock Report) are leading candidates on that account.
At the time of this article, the author did not have positions in any of the companies mentioned.