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.
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