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Could Stocks Keep Doing Well?

Russ Koesterich, CFA of BlackRock

Why There’s a Disconnect Between Economic Data and Performance

Recent weak economic data have confirmed everyone’s worst fears: The global economy is indeed decelerating. Yet risky assets have been advancing. Russ explains why and whether this can continue.

Recent weak economic data have confirmed everyone’s worst fears: The global economy is indeed decelerating.

Yet recently, nearly every economically-sensitive asset class advanced, including US stocks, commodities and high yield. This is a change from the past several months, during which trading has been largely driven by a negative reaction to the growing evidence of a global slowdown. So, why the disconnect now?

Market Realist – Could stocks continue to do well?

The Chinese economy (FXI) grew at an annualized rate of 6.9% in 3Q15, slightly down from a 7.0% expansion in the previous quarter. This is the slowest growth since 1Q09, mainly due to a slowdown in industrial output and a contraction in exports, which highlight the weakness in global demand.

While global macro data has been soft lately, global equities (ACWX) have risen. Since September 28, the S&P 500 index (IVV)(SPXL) has returned 7.9%, while developed markets, as tracked by the iShares MSCI EFA ETF (EFA), have risen 8.0%. Meanwhile, the iShares MSCI Emerging Markets ETF (EEM) has risen 13.1% as of October 20. However, these ETFs’ YTD (year-to-date) returns are -1.3%, 2.1%, and -6.8%, respectively.

While a decelerating global economy usually leads to declining global stock markets, this hasn’t been the case in the last three weeks. Stock markets have been comforted by dovish statements from the Federal Reserve. Weak macro data in the United States could lead to the Fed delaying the rate hike, supporting stocks for even longer. However, there have been other factors influencing the equity markets recently. Read on to find out the causes for the disconnect in the next part of this series.

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