In 2008/9, the world went through the worst economic crisis since the great depression of 1929. This collapse was caused by the increase in subprime lending to people who could not afford making the payments. After the crisis, the world economy started to recover. This recovery was fueled by the central banks’ decision to lower interest rates and use quantitative easing. The easy money policy – which still remains – helped spur a new wave of corporate and household spending. For example, the amount of share buybacks and dividends have increased sharply in the past few years.
This week, investors will celebrate the 10-year anniversary of the bull market, which started in 2009. As they celebrate the bull market, the world is now in a new normal phase where slow growth is the norm. Yesterday, China lowered its growth estimates for this year. This comes a few weeks after data from the US showed that the economy grew by just 2.6% in the fourth quarter. In Europe, the countries are going through a difficult phase, with many analysts forecasting a recession this year. Countries like Germany and Spain avoided a technical recession in the fourth quarter while Italy is already in a recession. Emerging markets too are not at ease. In fact, the low commodity prices have led to a significant slowdown in the Brazilian economy.
Today, the Australian government released the fourth quarter economic numbers that missed the analysts’ forecasts. In the quarter, the economy expanded by 2.3%, which was lower than the expected 2.5%.
Another evidence of the slowdown is the reduction in manufacturing activity. In fact, data from IHS Markit shows that the global manufacturing PMI is currently at 50.90, which is slightly above the contraction level of 50. In recent months, the PMI data from most countries has shown some increased weakness.
This global slowdown is coming at a time when the monetary policy is significantly supportive. In the United States, interest rates are at 2.50%, which is close to historic lows. In the European Union and Japan, interest rates are in the negative territory while in Australia, New Zealand, and United Kingdom, rates are close to zero.
This presents a potential major risk for the markets in case of a recession or correction. Convectional monetary theory states that when there is a recession or a correction, central banks are required to respond by providing easy money. With rates so low, it would be almost impossible for the central banks to respond. Further, the level of corporate and household debt has been increasing, with companies like AT&T having debts of more than $190 billion.
Therefore, in these risky times, it is important for traders to implement proper risk management strategies. These includes proper position sizing, proper use of trail stops, and the need for more short-term trades instead of long-term trades.