The International Monetary Fund (IMF) today boosted its forecast for global growth for both this year and next – telling folks at the World Economic Forum in Davos, Switzerland, that the world economy would zoom along at a hefty 3.9% pace for the next 24 months.
But it also warned that the next recession “may be closer than we think.”
This is a big deal.
And a big opportunity.
You see, this rosier-than-ever scenario serves as a proof point for the “cheap money physics” prediction I’ve been making for my paid-up Private Briefingreaders for two months.
The best part is, the higher-than-expected growth/higher-than-expected recession risk dovetail perfectly into our “accumulate” strategy that’s given us massive gains on stocks across the board. That strategy lets us take advantage of the growth now and hold back some cash to “average down” on stocks that we like in case of a pullback.
Let’s take a gander at the IMF forecast, look at how that fully supports our “cheap money physics” call on the Trump administration tax cuts, and consider some stocks that are worth zeroing in on.
When Money Gets Cheap, Stocks Get Going
Every year near the end of January, the Alpine resort town of Davos is the site of the World Economic Forum’s annual meeting. The nonprofit WEF, founded in 1971 (when it was called the European Management Forum, a name that changed in 1987), says it is “committed to improving the state of the world by engaging business, political, academic, and other leaders of society to shape global, regional, and industry agendas.”
Most folks just refer to the meeting as “Davos.”
And because it’s viewed as a gathering of the world’s economic cognoscenti, Davos is the focus of intense media attention.
And this year is no different.
For us, this year’s gathering is of interest because of this forecast. The 3.9% growth that the IMF is predicting for this year and next is up 0.2% for both years from what it predicted back in October.
According to Bloomberg Politics, that would represent the fastest growth rate since 2011, when the world was rebounding from a financial crisis that took the U.S. economy and many of its counterparts to the precipice of depression.
But it’s the “trigger” for this lickety-split acceleration in growth that caught my eye; about half the catalyst for the boosted growth forecast stems from the Trump administration tax cuts passed in December and enacted after the first of the year.
We’ve been talking about those tax cuts since early December – describing them as the “next” source of cheap money that could keep U.S. stocks in their current growth mode. We’ve even ID’d some of the biggest beneficiaries.
The tax cuts are the latest opportunity created by our “cheap money physics” theory – which has been proven in the “real” markets again and again.
That theory (really one of the fundamental laws of financial physics) is simple: Cheap money can’t be contained – it always squeezes out somewhere and makes its presence felt.
And if you identify where the impact will be the greatest, this cheap money can make you rich.
Indeed, it was the cheap money trigger provided by federal bailout money, rounds of quantitative easing (QE), and the zero-interest-rate policy (ZIRP) of the U.S. Federal Reserve that ignited this long-running bull market in U.S. stocks to begin with.
And thanks to the “tailwind,” this new infusion of cheap money that the tax cuts represent, U.S. stocks continue to surge. The S&P 500 rocketed 19.4% last year – including 6% in the fourth quarter, a “grand finale” no doubt aided by the promise of lower corporate taxes.
Just three weeks into the New Year, U.S. stocks are already up 4.3%.
Since the March 9, 2009, market bottom, U.S. stocks as measured by the S&P 500 are up 317%. The Nasdaq Composite is up 482%.
The cheap money “triggers” that have fueled that stunning bull market have also been among the catalysts for global growth – which was last this robust back in 2011.
Now, the IMF says that cuts to the U.S. corporate tax rate will serve as the biggest “shot in the arm” to the world’s No. 1 economy – the United States.
Those tax cuts will lift U.S. growth to 2.7% this year, 0.4 percentage points higher than the IMF was forecasting back in October. And thanks to those tax cuts, that projected U.S. growth was the highest among the world’s most developed economies.
According to the IMF, economic growth is accelerating in 120 countries – or about 75% of the world economy. That means the “recovery” is the broadest it’s been in seven years.
And as we know from our study of markets – and such technical indicators as the “advance/decline line” – the broader the trend, the more likely it is to continue.
Among developed economies, growth will be stronger than previously forecast in the Eurozone (2.2% this year, up from 0.3% in October) and Japan (up 1.2% this year, 0.5% better than in October). The United Kingdom – trying to navigate Brexit – will advance at a 1.5% clip this year and next, the IMF says.
The advantage the U.S. economy is gaining from its tax cuts is visible when compared to some developing economies, whose forecasts are largely the same as they were in October.
China will see its economy surge at a 6.6% clip (up 0.1% from three months ago). India will grow at a 7.4% pace – a forecast unchanged from October.
The current economic upturn is unlikely to become a “new normal,” IMF Chief Economist Maurice Obstfeld told journalists during his briefing in Davos on Monday.
And yet, the IMF says there are reasons to worry that this recovery isn’t destined to be as long-lasting as some might wish…
Among the concerns: major economies hitting their growth limits, worries that the biggest markets – the United States and China – could slow, and the ripple effect risks of a downturn in stocks. And because there are fewer “cheap money” triggers to work with, the world’s governments and central banks will face tougher battles.
“The next recession may be closer than we think, and the ammunition with which to combat it is much more limited than a decade ago,” Obstfeld, the IMF economist, told reporters.
*This has been a guest post by Money Morning*