April 17, 2013
After Monday's plunge of almost 266 in the Dow Jones industrial average, investors were buying again Tuesday, pushing up stocks more than 157 points despite an International Monetary Fund report pointing to a far weaker economy than Wall Street's cheery narrative has described lately.
The IMF report defied the storyline of a brisk economic recovery in the U.S. and gave credence to concerns that arose in Monday's sell-off as economic reports on manufacturing and retail sales and a slowdown in China unnerved investors. In contrast to the strong recovery theme, the IMF expects the U.S. economy to grow just 1.9 percent this year. That's below the IMF's 2 percent forecast issued in January and significantly below the 3 percent that some economists have been predicting. It leaves little cushion to weather an unexpected economic shock.
Meanwhile, the IMF noted "renewed worries" about the eurozone and the potential that recession there could drag down other areas.
"An uneven recovery is also a dangerous one," said IMF chief economist Olivier Blanchard.
With China the most powerful engine of growth in the world over the last few years, investors are jittery after the country reported growth slowing to 7.7 percent during the first quarter of this year. That's nothing like the recent past, when China's industrial production posted 14.3 percent average annual increases from the end of 2009 through the end of 2011. Those gains in China, and the nation's demand for products like Caterpillar construction equipment, helped make up for slow demand in the U.S. and elsewhere.
In a sign that China's strength is no longer as potent as it had been, Moody's Analytics economist John Lonski noted that prices of industrial metals such as copper and zinc have dropped 10.6 percent since the end of 2012. The declines have hinted at disinflation rather than the inflation that investors have been fearing lately while the Federal Reserve and other central banks have poured trillions of dollars into the economy. Last Friday and Monday, investors dumped gold, and the price fell more than $200 an ounce to a two-year low of $1,360.60.
The IMF predicted 8 percent growth for China but said it was re-examining the estimate after China announced 7.7 percent this week.
The IMF provides worldwide economic forecasts regularly and on Tuesday lowered its outlook for this year compared with its last report in January. With recession deepening in the eurozone, the IMF is estimating a 0.3 percent decline in gross domestic product this year rather than the 0.1 percent drop it forecast at the start of 2013.
The IMF report said, "we expect most euro area periphery countries, notably Italy and Spain to have substantial contractions" as demand within the eurozone is weak and there isn't enough demand from outside the region to buy enough products.
But in a surprising response to a lackluster report on the world economy, stock investors seemed to like what they saw in the report. It was another piece of evidence that the Federal Reserve and other central banks might keep pumping money into the system, instead of withdrawing stimulus.
In other words, it pointed to the conclusion that "they will continue to drown the problems in money," said Howard Simon, strategist for Bianco Research. "The dreary view of growth will keep this game going."
He expects this to end badly because the Federal Reserve eventually will stop printing money, interest rates will rise and heavy borrowing by businesses will leave them vulnerable as they face higher interest rates on their recent debts. But now, like Pavlov's dog, investors are doing what they usually do: buying stocks as they see more stimulus coming.
Mohamed El Erian, who heads the nation's largest bond company, Pimco, warned investors in a Wall Street Journal video that central banks have propped up prices on all assets — including stocks and bonds — to "artificial" levels.
Still, earnings reports by companies eased jitters from Monday. Both Coca-Cola and Johnson & Johnson beat estimates. And as earnings season continues over the next few weeks, if companies can exceed expectations on profits and sales, investors will probably continue to look past weak economic numbers and drive stock prices higher.
"When I was young, I believed in the real economy, but it turns out that was a stupid," said Simon.
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