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IMF again reduces growth outlook…The International Monetary Fund today reduced its
global growth outlook with most of the weakness centered in Europe,
particularly Germany, Italy, and France. The announcement also had some rather
alarming language pertaining to potential for a stall in the recovery,
acceleration in deflationary trends, and risks of market plunge once the U.S.
Federal Reserve starts raising interest rates.
What’s
the point? We believe today’s
announcement by the IMF is the primary factor contributing to today’s stock
market weakness. As we have mentioned in previous posts, the European economy
remains in a deep funk and the IMF report just confirms this. Deflation
continues to be a major risk for the Eurozone economy. Japan went through a
period of sustained deflation, so it can certainly happen. While Eurozone
monetary policies might be highly accommodative, the mechanisms to transmit the
policy to the economy (such as credit) are highly stunted to non-existent in
Europe currently. A key concern for investors is renewed possibility of
recession in Europe which could act as a drag on the entire global economy, and
thereby slow corporate earnings growth, a key driver of stock prices. The good
news is U.S. companies generally remain in excellent condition financially and
are generating record levels of free cash flow. This should be an important
factor in supporting U.S. stocks, along with the prospect of a strengthening
U.S. dollar.
