In recent days, global economic data has gone from weak to worse.
In the past few years, we’ve seen spring economic slowdowns accompanied by substantial stock market sell-offs.
Yet the stock market — even considering today’s sell-off — continues to be near all-time highs.
In a note published on Monday, Morgan Stanley’s Gerard Minack articulated the mentality of the market participants.
…This resilience is in part understandable: prior years’ mid-year setbacks typically had an overlay of systemic stress. This, for now, is pure-and-simple macro disappointment.
But the more important factor seems to be the strong consensus that any weakness will be temporary, with growth set to improve in the second half. …Despite downgrading forecast June quarter GDP (partly as payback for upgrading March quarter forecasts), second-half forecasts are little changed, and point to significant acceleration later this year.
On top of this, there’s a growing view that any near-term weakness will lead to further policy stimulus. Our team expects the ECB to ease monetary policy. More enticing – but, for now, far more speculative – is the view that the tide is turning against fiscal austerity.
To summarize: 1) we’ve seen this before, 2) we think the slowdown is temporary, 3) we think significant weakness will trigger stimulus, and 4) we think fiscal austerity is now less likely.
Still, Minack is pretty sure this resilience can’t hold for too much longer.
“With global growth and earnings now very soft, I still think that the odds favour near-term equity weakness.”
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