Negative economic data continued to come in this week that supports a slowdown in world growth and a declining stock market...
China first,
Retail Sales and Industrial production came in (again) lower MoM & YoY than what 'experts' (long biased) forecasters had predicted...
China is by far Australia's biggest trading partner.
- Less demand for products in China means less demand for Australia's resources.
- Less demand for our resources will mean less profits, lower share prices, lower market indexes, less jobs, less spending, yadi yadi ya ya...
Next we had the Euro countries,
Almost every economic data point came in well below forecasts expectations..
I also posted on Friday that the head of the ECB (Draghi) announced revised outlook downgrades in economic growth and inflation for the EU.
Basically the ECB just told you to 'short' the European stock markets and currency...
Germany's manufacturing PMI saw its peak in December last year.
January's declining 'bar' was confirmation of this and a possible caution signal that the expansion phase may now be heading into contraction...
This is a daily chart of the 'DAX' (Germany's top 30 companies)
Germany's stock market topped out the day before the release of the economic data and has continued to decline ever since...
Lastly we had the USA,
- Retail sales data came in above the previous month and also expectations but down YoY.
November's retail sales data (released in December) will always be tough gauge as Black Friday Sales are the biggest sales day/month for the year.
A peak in retail sales will likely be at the very end of any expansion cycle, as wages always peak at the very end of any economic cycle.
- Industrial production was up MoM but has continued to decline (trend down) since 2017.
- Manufacturing production & PMI were both down MoM and YoY.
(The website I use for the economic data charts hasn't updated the US December released numbers so no charts here, Investing.com do have updated charts to show the numbers though)
Soo...
Essentially, the stock market is just a reflection of the underlying economics of the country/world, with a healthy dose of 'Greed' & 'Fear' added into the equation...
Basically,
- A slow down in growth means there's less 'demand' for products.
- Less demand for products means there's less people that need to be employed to make them.
- When there's less people that need to be employed then that's less people are spending and so on...
Or simply put,
Lower/slower growth means lower profits
Lower profits means lower share prices (lower forward P/E)
Lower share prices means lower market indexes and so forth..
This continuous pattern happens in every economic slowdown.
The opposite would be true for economic expansion.
The expansion or contraction of an economy is a momentum gaining machine, this is why there are defining peaks in growth of an economy/stock market...
The expansion phase will see people spend more and thus 'demand' (stock prices) goes up.
The contraction phase (now) will see people spend less and so 'demand' (stock prices) will fall/drop.
(Apologies for the crude drawing,)
This is the basic concept for an economy/stock market.
- Black line is the medium line for economic expansion/contraction
- Blue line is the expansion (Bull market) phase
- Red line is the contraction (Bear market) phase
The peaks & troughs will see greed, fear, optimism and pessimism.
There are many other factors that help contribute to the expansion/contraction of an economy like interest rates (credit) and inflation/disinflation.
If we follow the economic data numbers, we would know that interest rates are likely at their peak in the economic cycle and will very likely decline from here on in based on the Fed's monetary policy of "Neither stimulate nor restrain economic growth"
By using the economic data we would know already that growth has indeed been slowing and at an accelerating rate so a lowering of interest rates or halt in raising rates seems increasingly likely, given the economic data...
This is 'front running' the consensus or can said to be have an 'edge' on the market..
By using the factual, fundamental economic data we can cut out the short-term 'noise' in the stock market and hopefully make better trading decisions from it.
For example,
Q. Why did the stock market have a mini crash when Trump got elected and then rallied hard thereon after...?
A. The consensus sold out on the unknown (Fear) and didn't understand that Trump's policies were actually very,
- Pro business
- Pro stock market
- Pro economic expansion
Q. Why did the stock only "rally" 1% and decline a further 7% after the supposed best news, trade tariff break through earlier this month at the G20...?
A. The tariffs are basically just short-term noise to the overall trend that the world's economies are in the contraction phase.
Sure, the tariffs are a factor in the economic contraction phase but they are by no means the cause and/or be the expansion savoir either...
Understanding the basic fundamentals of an economy and the stock market enables us to now use the economic data/information to help predict future movements in the stock market and hopefully turn a profit in the form of trades, which I will detail in my next post.
(20min delay)