Time to Read: 4 Minutes |
At Stratos Private Wealth, we closely monitor global economic indicators to guide changes in client portfolios. Recently, signs of global economic recovery have emerged. A combination of much easier global monetary policy and a modest reduction in geopolitical risk (i.e., the U.S.-China trade war and Brexit) are likely partially responsible for the improvement.
The Global Manufacturing Purchasing Managers Index edged up 0.1 point to 49.8 for October. While readings below 50 signify contracting manufacturing activity, the index rose for a third successive month. This marks the longest streak of improvement since December 2017. Historically, the manufacturing PMI has bottomed out five months before global economic activity. If this pattern continues, it could imply a recovery either late this year or in early 2020.
In addition, easing monetary policy across the globe has supported growth. As shown in the chart below, over 80% of central banks cut interest rates as their most recent move. This is up from just 38% in January. On average, monetary policy tends to lead global manufacturing by one year, again setting the stage for recovery early in 2020.
Stock markets also benefit from liquidity. The chart below shows money supply growth—the Fed is pumping real liquidity into the system.
Historically, the stock market (excluding dividends) has climbed 11.85%, on average, when liquidity growth exceeded 1.5%. It is currently well above that at 10.7%.
We view these early signs of recovery as an opportunity to rebalance our portfolios and deploy some excess cash. This leaves us closer to our benchmark weighting in equities. This is not, however, a recommendation to get aggressively bullish on stocks. We still remain slightly underweight on equities and overweight on high-quality bonds while we continue to assess the (potential) global recovery.
