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ITR Experts Say: Outside the US, Clouds are Gathering - Are You Paying Attention?

Domestically speaking, it appears the economy couldn’t be much better. As measured by US Gross Domestic Product, it is larger than it has ever been and gaining steam.

However, at this point in the business cycle, amid the optimism and sense of well-being, an uneasy question materializes: How long will it last?

Signals from the rest of the world suggest a possible answer: Not much longer.

While the S&P 500 – in record territory last week before a mild retreat – is back on track after a lull earlier this year, equity markets abroad indicate our market may face increasing headwinds during 2018’s closing stretch. The chart below shows the cyclical performance since 2010 of the S&P 500 (blue) versus the MSCI ACWI ex USA Index (green), which is composed of large and mid-capitalization non-US equities. Dips below the zero line indicate year-over-year contraction on a percentage basis while position above the zero line indicates year-over-year increase.

US Stock Prices Index to MCSI ACWI ex USA Chart

The global stock measure is in a clear decelerating trend. At the close of August, it was up a thin 2.8% from the August 2017 level and threatening to drop below year-earlier levels for the first time since 2016. The MCSI ACWI ex USA 1/12 rate-of-change, which peaked in January 2018, leads the S&P 500 12/12 rate-of-change by eight months. The leading relationship suggests that global stock market struggles are likely to infect the current momentum in US Stock Prices next month.

This is certainly a worrisome trend and just one of several international leading indicators moving in the wrong direction. Others in cyclical decline include the G7 Leading Indicator, the JP Morgan Global Purchasing Managers Index, and the Europe Leading Indicator. Furthermore, many foreign purchasing managers indexes, including China’s, are showing nascent decline.

In a globalized economy, ripples from Beijing or Brussels or Bangkok ultimately lap the shores of the United States. Today’s foreign headwinds can become tomorrow’s domestic headaches; stay with us so you see them coming

Connor Lokar
Economist