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How Long Can Stocks Advance as the Global Economy Slows?

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Stocks are trading near 5-year highs even though more signs are pointing to a global economic slowdown. How long can that disconnect continue?

Caterpillar (CAT), the world's biggest construction and mining equipment manufacturer, just cut its 2015 earnings outlook, citing slowing global economic growth. FedEx (FDX), Intel (INTC) and Norfolk Southern (NSC) have also issued earnings warnings.

Standard & Poor's cut its forecasts for growth in Asia and Europe and IMF Managing Director Christine Lagarde warns that the global economy is "still fraught with uncertainty."

"There's a real disparity" between the markets and the global economy, says The Daily Ticker's Henry Blodget.

In the U.S. the fiscal cliff is fast approaching. That's when billions in spending cuts and tax increases mandated by the Budget Control Act of 2011 will take effect, cutting the deficit but also slowing growth and raising unemployment. In Europe, the Spanish economy is spiraling downward and investors are anxiously waiting to see if Spain asks for a bailout. The eurozone's fourth largest economy has a 25% unemployment rate and its bond rates are approaching 7% again. According to Tuesday's New York Times, the country is also dealing with rising hunger.

Christine Lagarde, the managing director of the IMF, says the extent of the global slowdown will depend on how policymakers around the world react. "We need a sustained rebound, not a bounce," Lagarde said at the Peter G. Peterson Institute for International Economics Monday. "If this time is to be different, we need certainty, not uncertainty. We need decision-makers to be real action-takers. We need delivery."

She wants Europe to implement a strong banking union and eurozone members to carry through on their financial pledges to the European Stability Mechanism, or ESM. As for the U.S., she is urging U.S. policymakers to act before the massive tax hikes and budget cuts kick in at year-end. Doing nothing could cut U.S. growth by 2%, says Lagarde.

"Nothing will happen until at least after the election," says The Daily Ticker's Aaron Task.

Morgan Stanley doesn't want to wait until then. Yesterday, just 11 days after the Fed announced a third round of quantitative easing, Morgan Stanley called for QE4.

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