NATHAN PETERSON: Hello, and welcome to the May 25 Schwab Market Snapshot. I’m Nathan Peterson sitting in for Randy Frederick. Today, I’m joined by Jeffrey Kleintop, Schwab’s chief global investment strategist, to discuss the state of the global economy. Welcome, Jeff.
JEFFREY KLEINTOP: Hi, Nate. Great to be with you.
NATE: So, Jeff, where does the global economy stand as we near the halfway point of 2017?
JEFF: Well, it’s a good question to ask. Ultimately, global economic growth drives corporate profits, which, in turn, drive stock prices. So it’s great to do a checkup on the health of the global economy from time to time. And it’s in pretty good shape right now, although growth was a little mixed in the first quarter. In Europe, it was pretty good. We saw a 2% pace of annualized GDP growth, and that extends that same 2% pace of growth we’ve seen since the end of 2014.
In Japan, growth came in at 2.2% annualized in Q1, and that’s a pretty solid growth rate. It’s also the fifth quarter in a row of growth for Japan. Now, that may not seem like much, but that’s actually the longest stretch of growth Japan has seen in 10 years, so that was pretty good. In contrast, we saw a slowdown in growth in the United Kingdom; they grew just 1.2%, and the U.S. was pretty disappointing at 0.7%. But we have seen growth continue or even rebound in the U.S. in the second quarter, and that may be good news to support earnings in stock prices.
NATE: That sounds like good news for developed markets, but what about emerging markets like China?
JEFF: Yeah, there we’re seeing a little bit of a difference, but not in first-quarter growth. China’s growth in the first quarter was 6.9%. Well, if you believe the government’s data, but it was probably pretty close to that. And that’s ahead of the government’s target of 6.5%. But China has shown signs of slowing in the second quarter. We’ve gotten a swath of recent data reports—from retail sales, to industrial production, to borrowing and lending, you know—all showing signs of weakening. Leading indicators, too. We’ve got the Purchasing Managers’ Indices on China, and that’s a pretty good private sector data. They’re leading indicators and they’re rolling over now two months in a row. We’ve also seen lending conditions tighten a little bit. Interest rates have gone up. In fact, the yield on the 5-year government bond in China has drifted above the yield on the 10-year, and that inversion of the yield curve, as we call it, is often a sign of slower growth to come.
So the impact of a slowdown in the world’s second-largest economy heading into the summer may have a few implications for investors. One, it might mean the rallies this year in the euro and the yen currencies turn around and begin to weaken. Both Europe and Japan are a little bit more sensitive to Chinese demand in the U.S. economy, and so that might show up there. We may also see a drop in commodity prices if China’s demand for commodities slows a little bit. That could impact stock markets in countries like Australia, which are very tied to commodities, and it might have an impact broadly in stock markets.
But any of those impacts are likely to be temporary. Remember, growth here, as we’ve just recapped it, is pretty broad and pretty solid in the world’s developed markets. And that means that any of these dislocations, or shifts in currencies or commodities or markets, will probably just be temporary. And a well-diversified asset allocation will probably be a great way to buffer any of the volatility that we might see extending from a slowdown in China here as we enter the summer.
NATE: Well, that’s all the time we have for today. Thanks for joining us, Jeff.
If you have questions or want to read more from Jeff, you can do so in the Investing Insights section of Schwab.com. You can also follow him on Twitter @JeffreyKleintop
. We’ll be back next time. Until then, invest wisely. Own your tomorrow.