Last night on CNBC’s Fast Money we had a discussion about the impact of imploding commodity prices on the economy and the financial markets. I am the farthest thing from an economist, but since crude topped out in June of 2014, and its subsequent 55% collapse, and the rout in industrial commodities, global GDP has barely been unable to eek out year over year gains for the first half of 2015 and will have an uphill battle for the second half.
What gives? I have been told a thousand times over the last year that lower for longer crude and industrial commodities should be a boon for consumers, essentially a tax cut, and lower input costs for corporations should spur profitability. So what happened? the U.S. dollar happened. QE ended, the baton was passed and the rest is stuff that will be debated for decades, maybe centuries. But in the near term, as my friend (and Macro diva for the TickerDistrict) Brian Kelly points out, he likes to look at Global PMI’s for forward looking analysis, per a note from JP Morgan:
Growth in the global manufacturing sector remained lackluster at the start of the third quarter. At 51.0 in July, unchanged from June, the J.P.Morgan Global Manufacturing PMI™ – a composite index produced by JP Morgan and Markit in association with ISM and IFPSM – registered its joint-weakest reading during the past two years.
Bk suggests that JP Morgan’s Global PMI indicators shows that “global growth has essentially flat-lined. This means the global economy is susceptible to shocks. The deflationary shock of lower oil prices and higher dollar is the visible result of a slowing global economy. When one looks at the sub components of the Global PMI one finds that global exports are now in contraction.”
From a markets standpoint, the collapse in commodities, the bounce from the Q1 lows, albeit a brief one, and a re-test of the prior lows has the potential to do some serious psychological damage for those who are convinced that the weakness is “transitory” and based on some unique supply characteristics. Lump on top of that the weakening global economic data, and we could be on the precipice for the first meaningful stock market decline in the U.S. in a very long time.
Oh and in case you missed it, Apple (AAPL) has just entered an official correction, down 10% from its all time highs made in April, and breaking the uptrend that has been in place for two years, and closing below its 200 day moving average for the first time since late 2013:
AAPL is an important part of the puzzle to me because it has been a stock that lots of peeps hide out in, and has what I would say is a bubble of positive sentiment. A collapse here could cause investors to take profits in other stocks once thought to be untouchable, and if we had a situation where too many peeps headed for the door at the same time in much loved and concentrated holding like AMZN, FB, GOOGL, NKE, DIS, it could be the impetus for a sharp decline as it appears that few stocks have been doing most of the heavy lifting. Ok, so I remain cautious about committing new cash to equities. Yes I have been that for months, but the S&P 500 has traded in a fairly tight range for months, with most stocks performing poorly and a few stocks (the ones listed above) masking a lot of poor performance with the backdrop of a weakening global economy.
See my friend Carter’s Worth’s commentary on AAPL’s technical set up and the overall breadth in the market from CNBC’s Fast Money last night: