It Only Gets Worse For Europe. U.S. Stocks Look Out?

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Includes: DMRL, EPS, IVV, PPLC, RSP, RVRS, RYARX, SDS, SFLA, SH, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SSO, UPRO, USMC, VFINX, VOO
by: John M. Mason
Summary

Economic growth forecasts for the European Union have been slashed, making expectations for expansion in the EU the worst in five years.

Many analysts believe that weak economic growth in Europe, connected with a "bad" Brexit, could have a negative impact on US stock prices.

Politically, Europe does not seem to be in a position to turn this around and could face even more turmoil in the future, again not a positive outcome for growth.

Italy has been in a recession over the past two quarters.

Now, the European Commission “has slashed Italy’s growth to the lowest level in five years.”

Brussels cut “its annual GDP forecast for Italy in 2019 to 0.2 per cent from a previous projection of 1.2 per cent — marking the weakest annual output since 2014.”

Furthermore, the “broader eurozone forecasts were also cut because of weakening global trade, fears of a China slowdown and uncertainty around Brexit. Growth forecasts for this year were revised from 1.9 per cent to 1.3 per cent. Brussels expects eurozone growth of 1.6 per cent in 2020.”

Germany, facing weak consumer demand and an uncertain global trade outlook, also had its forecast reduced to 1.1 per cent from 1.8 per cent.

Expectations about the future growth of France have also been lowered.

In addition, the whole Brexit affair seems to be weighing on the future as uncertainty builds as to what the consequences of this “farce” is leading to.

Politically, Europe… and Great Britain…are a mess. And, their economies are suffering for it.

Right now, there seems to be no apparent pathway for Italy, Germany, France, Great Britain and others, to turn the situation around.

Discontent has ruled the ballot boxes over the past two years or so and, unfortunately, this discontent had no real plan for resolving the issues the discontent was centered around. Consequently, it appears as if the discontent is only leading to a period of further discontent.

And, in Brussels, where Brexit negotiations take place, frustrations are being expressed about the failure of those in Great Britain seeking to leave the European Union, to have any real plan, or, even some idea, of what they are shooting for.

This situation is not a good one for the nations involved, but it is also not a good situation for other economies.

Other economies and other financial markets have a great deal of interest in what happens to Europe and Great Britain.

For example, what happens to the United States stock market may be directly connected with what happens in Europe. Some believe that the economic future of Europe will significantly impact stock prices in the United States.

And, as this realization grows, one can focus in on the dilemma that is facing central banks.

The European Central Bank just ended its several year effort to provide the European Union with “quantitative easing.” Now, as officials at the ECB begin to face what happens after the end of “quantitative easing,” they are not hit with the reality that the economies of the European Union are facing some pretty dire times.

Then you have the Federal Reserve System in the United States. The Fed has been raising interest rates over the past couple of years as it attempted to bring short-term interest rates back to a “more normal” level.

Right now, the Fed has put this effort to raise its short-term policy rate of interest “on hold” as it continues to sort through the data. The underlying feeling is that the effort to raise the policy rate will continue at some time in the future, although there is no real sense of when this might be.

But, as far as Europe is concerned, it does not need the Federal Reserve to agree to any more increases in the policy rate. If the ECB is in the position that it cannot raise its policy rate for an extended period of time, it certainly does not want the Fed to begin raising its policy rate again.

The problem in Europe is that members of the European Union still face the daunting task of reform and restructure. Most European nations, including the biggest ones, are still in need of making major changes to their economies. These countries are not as competitive in the world as they should be and, consequently, will only suffer more if they fail to move their countries into the twenty-first centuries.

A little while ago, there was significant hope on the continent that things were moving toward reform and restructuring. Angela Merkel was the Chancellor of Germany and was leading the effort. Then there was Matteo Renzi, who was the “modern” Prime Minister of Italy. Following these two came the election of Emmanuel Macron as the President of France.

Yet, now, all this hope has departed and we are facing a European economy that will experience the lowest rate of growth in the last five years.

Neither side of the political spectrum seems to have the leadership to turn this around nor neither seems to have a workable plan to others can buy into.

Bottom line, things seem pretty dismal without much to hope for. If the economics don’t get better at this time in Europe, it is probably the case that the political situation will not get any better either. For the time being, the discontent will only grow.

Investors in the United States stock market, then, beware.

If the argument in “Requirements for Stronger Stock Growth” is correct, then one can expect a weaker US stock market in the future.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.