The rally in global equities, which has carried share prices to heights unreached since 2008, stalled last week as the marketplace struggled to evaluate the current risks facing the world economy. Stocks listed from Europe to the United States slipped as concerns of a slowdown in global growth were drawn into focus.
The selling arrived in the wake of the release of a dour assessment of the world’s economy by the International Monetary Fund (IMF) last Monday and accelerated following a disappointing start to corporate earnings season. Citing potential problems on both sides of the Atlantic, the IMF lowered its projection for the expansion of global growth to 3.3% for this year, and 3.6% for 2013 (Bloomberg News). The International Monetary Fund specifically highlighted the lingering effects of the European sovereign debt crisis, as well as the political gridlock in the United States, as risks that hold the potential to destabilize global financial markets (New York Times). In a reflection of the difficulties created by the lack of a substantive policy response by the Spanish Government to the current rash of problems confronting the country, Standard & Poor’s on Wednesday lowered the nation’s sovereign debt rating two notches to BBB- and downgraded their outlook to negative.
Earnings season saw it’s unofficial start last week as Aluminum manufacturing giant, Alcoa Inc.* reported results for the third quarter, which exceeded analysts’ estimates. Although the company’s revenue and per-share numbers were better than expected, a drop in their forecast of global demand for the heavily used industrial metal sent its stock price markedly lower last Wednesday. Following on the heels of Alcoa’s disappointing comments, the engine manufacturer, Cummins Inc. declared that it was lowering its profit projections for the remainder of the year as a result of waning demand (Wall Street Journal). The outlook for the global economy offered by these two manufacturing behemoths highlights the challenges currently facing investors, as they struggle to weigh the risks of an economic deceleration against the coordinated efforts of several of the world’s most powerful Central Banks to maintain expansion.
*Shown for illustrative purposes only. This is not a security holding of Brinker Capital.