Bad Week for Equities, Good Week for Bonds

Setting off last week's free fall was more bad economic news out of Germany combined with a report from the International Monetary Fund

Robert Johnson, CFA 13 October, 2014 | 1:59PM
Facebook Twitter LinkedIn

It was a very bad week for worldwide equities and commodities while bonds and conservative investments did quite well. Setting off last week's free fall was more bad economic news out of Germany combined with a report from the International Monetary Fund that again reduced its forecasts for worldwide growth. While the report wasn't exactly new information, it was a catalyst for investors that had already grown a bit weary of high valuations.

That generally bad news for the economy turned into good news for some on Wednesday when the Federal Reserve minutes mentioned worries about the world economy. Some investors surmised that those worries might lead the Fed to raise rates later rather than earlier.

Then reality set in again on Thursday when everyone decided slowing growth wasn't such a good deal after all. Falling oil prices didn't help that very important sector of the market, either. While I generally like falling oil prices because of the positive effects on the consumer, prices have now fallen enough to potentially slow the U.S. oil boom if this week's prices are sustained. Worse, falling oil prices could begin to really squeeze Russia, which could cause them to make even more provocative manoeuvres on the world stage.

IMF Reduces its Growth Forecast

The IMF releases one of the more comprehensive forecasts of global economic growth several times a year. Markets seemed to take the new report as some kind of shocking revelation. Instead, I think the report still looks a little too optimistic, especially relative to China and Europe.

Overall, the report the report now predicts just 3.3% growth in 2014 and 3.8% for 2015, down 0.1% and 0.2%, respectively, compared with the IMF's July forecast. The new forecast means that the world growth rate has been basically unchanged in each of the latest three years.

Each year usually began with hopes of an improving situation, only to see those hopes dashed by the time the final numbers were reported. This same October report, produced a year ago, was forecasting 3.6% growth for 2014, which has now been downgraded to 3.3%. Keeping with IMF tradition, things will be better next year and growth will accelerate to 3.8%.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

Robert Johnson, CFA  is director of economic analysis with Morningstar.

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Modern Slavery Statement        Cookie Settings        Disclosures