The stock market fell on Wednesday on news that the World Bank revised its global growth estimate downward for 2014 from 3.2 percent to 2.8 percent. While the S&P 500 was down a modest 0.4 percent, investors have become used to an ever-rising market making this a newsworthy event. However, in the broader scheme of things, stocks barely moved.
Despite the fact that investors expressed concern over the World Bank’s revisions, the writing has been on the wall for some time. We can parrot the World Bank’s reasons here—cool weather in the United States during the first quarter and trouble in the Ukraine. But if you look closely at the revision, the bulk of the downgrade came out of developing economies. While Russia and the Ukraine are developing economies, they don’t make up a large portion of this class of countries, which includes China, Brazil, Mexico, Chile, Ghana, among several other countries. Emerging market stocks performed more or less in-line with American stocks if we compare the S&P 500 to the iShares Emerging Market ETF (NYSEARCA:EEM), both of which have risen about 5 percent for the year.
The simple fact of the matter is that these countries are seeing slower growth because they are exporting less, and they are exporting less because developed countries are consuming less. Emerging market economic growth is largely dependent upon their exports to developed countries such as the United States, and their central banks keep their currencies weak in order to make them more appealing trading partners for developing nations. But as developed nations consume less—as they have too much debt—they import less from the developing nations, which in turn slows down their economies. Meanwhile the developed nations’ economies don’t decelerate, or they don’t decelerate as much because the difference is made up for by central bankers and politicians.
This, in a nutshell, is why the global economy is slowing, and these headwinds will put pressure on global economic growth until the developed economies deleverage and start to grow their economies on a solid foundation of manufacturing and production rather than debt creation and services.
With this basic outlook, we can come up with a few investment strategies that should succeed in this kind of environment.