If the US economy slows, will the world economy slow, too?

Many market watchers believe that even if the US economy slows (as it looks like its doing), the global economy will stay in the growth lane because emerging markets like China, India, Brazil and Russia will more than make up for US slowing.

A look at historical information and the global yield curve seems to contradict this. William Hester, CFA of Hussman Funds wrote a great article addressing this subject.

The global yield curve is a way of looking at the yield offered by government bonds around the world at different maturities. By comparing short to long term bond yields, one accesses one of the most reliable predictors of economic growth.

You see, when short term rates are equal to or higher than long rates, this almost always signals economic slowing and, usually, a recession. When short rates are equal to long rates, that’s referred to as a flat yield curve. When short rates are higher than long rates, that’s called an inverted yield curve.

Using global bond yields, as Hester does, a flat or inverted yield curve usually precedes a recession by a year or two. As he shows, the global yield curve turned flat last July, perhaps signaling that global earnings growth may slow, too.

Although the yield curve is not a fool-proof method of determining future economic growth, it’s been reliable enough that it shouldn’t be ignored, either.

Although it looks like the world economy is currently humming right along and will easily weather the US slowdown, the yield curve is telling a different story.

As Hester suggest, this has historically been a bad time to be in industrial, consumer discretionary or energy stocks, and a good time to be in materials and consumer staple stocks.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.