(Forbes) The World Trade Organization, the International Monetary Fund, and a growing sloth of bears on Wall Street may believe yesterday’s manufacturing data proves the recession is near, but BlackRock thinks they are wrong.
The $6.8 trillion asset management firm says policy stimulus in countries like China will translate into a pickup in global growth over the next six to 12 months. The recession story that dominated the headlines in August has been shelved.
Major central banks have eased monetary policy in recent months, delivering on the anticipated policy pivot that gives BlackRock the confidence to stay invested in this very long business cycle. July marked the tenth year of economic expansion in the U.S., thanks in part to low interest rates and fiscal stimulus from the Trump Administration.
BlackRock researchers led by Elga Bartsch note, however, that the road to recovery could be “bumpy” due to the trade war.
“We see growth troughing over 6-12 months, supporting our moderately pro-risk stance over this period,” Bartsch and her colleagues wrote in a note published by the BlackRock Investment Institute on Monday.
The record-long U.S. economic expansion is supported by healthy household spending and looks unlikely to morph into a deeper downturn any time soon.
On Monday, ISM survey data printed well under 50 for the second month in a row, prompting a sell-off in the market.
Last month, Wall Street got its rate cut by the Fed, deemed an insurance policy against Trump’s trade tariffs against China. More tariffs were expected in December but now it looks like they may be on hold. China trade negotiators will meet in Washington DC next Thursday, with some in the market thinking the Republican Party base – big corporations and big investment banks – will be successful in lobbying the president to hold off on new tariffs, but pressure China on intellectual property and technology transfers instead.
The trade war is bad for growth mainly because it impedes corporate investment and new purchase orders as no one knows what the price of their imported goods will be a month from now. Much of it depends on the new whims of Washington.
Tariffs are still low enough that China manufacturing is more attractive than other countries, numerous companies have said in informal surveys and in polls published by the U.S. China Business Council.
In China, the central bank cut bank reserve requirements, lowered private sector borrowing costs and boosted infrastructure spending.
BlackRock says China’s stimulus remains limited, with a focus still on shoring up the securities and currency market. They prefer U.S. equities over Europe and China, and like emerging market bonds in the current low-yield environment in the advanced economies.
Another reason for the more positive outlook from BlackRock is geopolitics beyond the China trade war are not as hot as they were a few weeks ago.
In a refreshing, surprising turn of events on Monday, Saudi Arabia said it did not want war with Iran and would begin a diplomatic discussion with them and the Houthis of Yemen.
This development has the potential to reduce geopolitical risk in the region. Drone attack on two Saudi oil facilities last month spooked investors and sent oil prices higher. But Saudi’s overtures to Iran and Yemen have contributed to the recent declines in oil prices. Oil prices fell 3% on Monday to $54.25 barrel and then fell another 0.8% on Tuesday to $53.61 for WTI crude. The decline in oil was likely the main factor pulling Treasury yields lower this week, with the 10-year yield falling to 1.64% yesterday.
Meanwhile, since its intra-day peak this year of $1557 on September 4, gold has fallen around 5.5%.
“The bulls have lost some of their power and the short term outlook for gold may remain bearish as long as the price stays below its 50-day moving average,” says Naeem Aslam, chief market strategist for ThinkMarkets in London.
Gold’s fall can be linked to Iran-Saudi tensions easing, but also to the latest turns related to the impeachment drive by House Democrats.
Markets see impeachment as a risk, but have gotten used to the Trump uncertainty of the last two years. It can almost be banked upon that what starts off as a hot, loud, crackling fire at Trump’s feet ends up cooling off, or at the very least, not burning the President. Investors are likely discounting the impeachment inquiry as a non-threatening, partisan exercise for now, opting to worry about it later, if at all.
Corporate earnings are still painting a nice enough picture for investors.
“We see little reason to call in life support on the current market and economic cycle, despite its advanced age,” says Tony DeSpirito, director for investments in U.S. active fundamental equity strategy for BlackRock.
“The U.S. consumer remains a bright spot, with strong spending reflected in second quarter GDP and August retail sales. We expect the positive tone to continue,” he says.
U.S. household savings rates are above pre-crisis levels from 2007, and jobs and wages are still growing. “This spells good things for the consumer, which dominates the U.S. economy,” DeSpirito says.
