A slowing but growing economy
The global economy has slowed, but economic growth appears to be holding up better than generally expected. In our view, this is one of the reasons for the market recovery. The global economy grew by 1.5% in the second quarter of 2023. The International Monetary Fund (IMF) forecasts growth of 3.0% for 2023. That’s not a huge success, but it’s anything but a recession. The table below shows recent progress in global gross domestic product (GDP) metrics. Even though some economies experienced slight quarterly declines in 2022, this still resulted in a return to more normal levels of growth in 2023. However, keep in mind that GDP is a historical measure with little predictive value for future stock performance.
How service and manufacturing indicators behave
Some recent economic indicators also suggest that the global economy has been more resilient than many stock market hypochondriacs expected. Purchasing Managers’ Index (PMI) reports are economic signals derived from monthly surveys of private sector companies. PMI readings above 50 indicate that more companies are expanding. Values below 50 indicate a stronger contraction. The chart below shows that the overall composition of global PMIs (purple line) was above 50 for most of 2023. The strength of the services PMIs (green line) largely offset the weakness of the manufacturing PMIs (gold line). This is normal in today’s service-oriented world.
How Stocks Respond to GDP Growth
The slowdown in global economic growth could worry investors who assume that strong stock returns require robust GDP growth. However, stocks can perform well when the economy is growing, regardless of the magnitude, as the chart below shows. Stocks typically experience a long-term upward trend unless the market anticipates an economic recession. Today, most major economies, including the United States, continue to grow at a modest pace.
We caution investors not to focus solely on backward-looking GDP numbers. Currently, signs point to a healthier economic reality than our gloomy expectations suggest. A recession is always possible. Even if one were to materialize, we believe any market hypochondriacs that have been predicting one since early 2022 have likely weakened the power of surprise to move markets. For now, we believe stocks should enjoy an economy with a healthy bill of health and the profits that come with it.