VERSACE: From the frying pan into the fire

ANALYSIS/OPINION:

I have gotten several emails over as many weeks criticizing my tone and outlook as being “far too negative” and being a “Debbie Downer” when it comes to the economy and the stock market near term.

Normally, my response is that I am simply letting the data — economic or otherwise — talk to me rather than impart the view I would like onto the data. This week, however, it seems the negative tone in my recent columns has been substantiated as concerns over a global slowdown have jumped and stock market indices have dropped.

Regular readers and investors alike are rather familiar with the fact that economic data has been signaling a softening economic recovery for the past few months. In fact, the readings of several key economic metrics, such as the Philly Fed Index and the Empire Manufacturing Index, have been negative of late. While European sovereign debt issues were present several months ago, the weakening European economic landscape has revived default concerns over the past several weeks. As I write this, there are still many questions — both short term and long term — as to what the fate of Greece will be.

These, along with the need for earnings expectations to be revised lower to reflect the growing number of negative gross domestic product revisions for 2011 and 2012, have been fueling my growing concern over the past several weeks.

This week my concern has grown even more following several news items that signal the economic slowdown is more global in nature. On Tuesday, the International Monetary Fund cut its forecast for global economic growth, mostly because of “anemic” growth in developed economies that the IMF estimates will grow a mere 1.5 percent this year. The IMF’s revised forecast now calls for global growth to moderate to about 4 percent through 2012, from more than 5 percent in 2010; this compares to its prior forecast just three months ago that called for growth of 4.3 percent for 2011 and 4.5 percent for 2012.

Next up on Wednesday, while announcing “Operation Twist,” the Federal Reserve shared that it sees significant downside risks to the U.S. economy. While it’s true the stock market tends to come under pressure when the Federal Reserve talks about the domestic economy, the S&P 500 shed a quick 3 percent following Wednesday’s commentary.

Upon waking Thursday morning, investors saw significant red ink in the futures markets for the domestic stock indices. While some of the expected market declines could be attributed to renewed speculation over Greece or follow-through from Wednesday’s late sell-off, the futures were under pressure given the latest gloom from Europe and China.

Early Thursday morning, the Flash Markit Eurozone Services Purchasing Managers’ Index (PMI), which measures business activity at thousands of firms from banks to restaurants, sank to 49.1 in September, missing the consensus forecast of 51.0 and falling from August’s 51.5 reading. Adding fuel to the global slowdown fire, HSBC’s China Flash PMI showed the factory sector shrank for the third consecutive month in September, pointing to a slowdown in the world’s second-largest economy.

That was not the end of the bad news on Thursday before the 9:30 a.m. opening of the domestic markets: FedEx Corp. cut its earnings expectations for the fiscal year ending in May due to slowing global economic growth. Last week, FedEx’s rival United Parcel Service said growth is slowing around the globe.

Economists have been slowly adjusting up the probability of a double-dip recession over the past few weeks and one has to look no further than the commodities markets to see that at least some people think that will be the case. If things continue along the path they have been, we could indeed be in another recession, but even if we don’t, consumers and companies alike will be conducting their business and spending as if we are in one.

For the prepared and patient investor, the ensuing stock market drops bring opportunity, eventually. Stay tuned.

• Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm in the Washington, D.C., area. He can be reached at cversace@washingtontimes.com. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.