Get ready for a ‘synchronized economic bounce’

There continues to be widespread concerns about the global economy. Many are wary of a chronically disappointing recovery, reeling from the aftermath of another crisis de jour in Brexit and in a world which now boasts negative sovereign bond yields as commonplace.

Perhaps global growth fears are best illustrated by the unconventional, massively accommodative economic policies for the first time being employed in concert about the globe.

These panicky policy responses being employed not only in the U.S. but also by Japan, the Eurozone and China are fueling fears that the recovery is in trouble and the current surprising stock market run is simply a sugar high without any fundamental underpinnings.

However, we believe the first synchronization of economic policies in this recovery is likely to produce a rare global synchronized economic bounce. While the U.S. has persistently employed stimulus, other developed and emerging economic policies have often been in conflict. Today, though, Japanese policy officials are no longer hesitant but rather are implementing full-out Bernanke stimulus.

Likewise, the Eurozone, which earlier adopted fiscal tightening, is now also fully embracing central bank balance sheet expansion. Moreover, the oil crisis has forced energy-based economies like Canada and Australia, which earlier felt sheltered from many ongoing global struggles, to recently boost accommodation.

Finally, China is no longer attempting to moderate its recovery as it was until 2015 but rather is using all weapons (a collapse in its sovereign bond yield, a surge in the growth of its money supply and a more aggressive Yuan devaluation) to quicken growth. While few may expect it, economic policies around the world are finally attuned suggesting the odds of a synchronized global economic bounce may be far greater than widely perceived.

Indeed, a global economic upturn may already be underway. As illustrated by the enclosed chart, the Westpac Positive Surprise Global Index has surged since March to one of its best levels of the recovery. This index measures the percentage of global economic releases beating consensus estimates in the previous 8 weeks. Based on economic surprises, global economic momentum has changed quickly this year. In late February, this index was weaker than 94 percent of the time in this recovery.

Now, a few months later, most major economies have positive surprise readings and the overall global surprise index is better than 82 percent of the time. Perhaps because global economic momentum has improved so fast in recent months, most simply do not yet fully appreciate the change.

With the exception of sovereign bond yields, improving economic momentum is also increasingly suggested by the financial markets. The U.S. stock market has reached new record highs and is up by about 25 percent from lows earlier this year. Similarly, in U.S. dollar terms, the MSCI all country ex-U.S. stock price index has risen by about 16 percent from early year lows and the MSCI emerging market stock price index has jumped by about 33 percent!

Moreover, the global stock market rally is broadening around a "better economic growth" theme. Increasingly, it is being led by higher beta and more economically-sensitive sectors including technology, industrials, materials, energy, small capitalization stocks and emerging market stocks.

The U.S. commodity market is also signaling better economic momentum. Crude oil prices have risen by about 85 percent from early-year lows while the overall S&P GSCI U.S. commodity price index has recovered by about 36 percent! Even the Journal of Commerce industrial commodity price index (those commodities most sensitive to economic activity), has risen by 22 percent from January lows.

Finally, while sovereign bond yields have not yet responded much to improved economic growth (are they being overly manipulated by global policy officials?), corporate bond yield spreads continue to tighten about the globe reflecting lower credit risk implied by improved economic momentum.

In a rare show of solidarity, policy officials everywhere are attempting to improve the economic recovery, economic surprise indexes have strengthened considerably across the globe and the financial markets are increasingly reflecting better economic momentum.

While we are not forecasting strong economic growth any time soon, we do suggest investors consider an outcome which few expect – a synchronized global economic bounce. This would certainly force a change in the consensus view, boost earnings expectations, quicken the exit strategy by the U.S. Federal Reserve and suddenly make the recent stock market move appear much more fundamentally supported.

Commentary by Jim Paulsen, chief investment strategist and economist, Wells Fargo Capital Management, a unit of Wells Fargo Capital Management.

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