Softer Economic Growth = More Defensive Portfolios

There are few signs of a recession, but slowing growth is having an impact. Russ explains why and what steps to take.

The global economy is slowing, a fact not lost on investors. January’s faith in a global synchronized recovery has given way to nagging concerns over “peak growth.”

Back in August I highlighted the potential for economic deceleration. At the time I highlighted three warning signs: weakness in non-U.S. economies, negative economic surprise indexes and softer manufacturing and housing. Unfortunately, the last three months seem to have confirmed the early warning signs.

1. Global manufacturing looks to have peaked.

It now looks even more likely that global manufacturing peaked in early 2018 (See Chart 1). Moreover, while China and Europe rolled over earlier this year, the United States is no longer immune. The ISM New Orders Index, a good leading indicator for manufacturing and the broader economy, is slipping: It is now at its lowest level in 18 months, before the “sugar-high” of last year’s tax cut, although it is still comfortably over 50.


2. Financial conditions are getting tighter.

Higher rates, a stronger dollar, a more volatile stock market and less benign credit markets equal more expensive and less available money, i.e. a tighter financial conditions. This is evident in a number of indicators, including the Goldman Sachs Financial Conditions Index (GSFCI). Tighter financial conditions don’t just impact financial assets, but also the real economy. As borrowing costs rise, confidence is challenged and credit growth decelerates.