June was a choppy month for global markets, as a combination of rising unemployment, mixed economic data, and pessimism regarding the end of QE2 led stocks to sell off sharply. July started off with an impressive bang; however, stocks hit a wall today on dismal jobs numbers, with the Dow off more than 100 points midday. Yet this is just another temporary blip in the ongoing global bull market.
On a macroeconomic level, here is what I expect to see in the second half of the year:
1. Weak job growth in the United States will force the Federal Reserve to continue its dovish monetary policy. With weak employment, housing and manufacturing data, many economists expect 2% GDP growth in the United States instead of the 3.5% growth in a normal recovery.
And based on Fed Chairman Ben Bernanke’s statement that he expects the economy to resume growth in the second half, we will not see another round of quantitative easing (in other words, QE3) unless unemployment shoots above 10%.
Nevertheless, there will be no rate hike until year-end, and the current zero-interest environments will persist. This will continue to fuel liquidity for the stock market.
In the unlikely event that the economy deteriorates significantly, the Fed will then engage in QE3, which will generate even more liquidity for stocks to move higher, just like in the fourth quarter of 2010.
2. Major U.S. companies will report robust second-quarter earnings next month. Despite the sluggish employment picture, most major U.S. corporations have enjoyed healthy profit growth because of strong economic recovery in Asia and Latin America.
Even in the United States, most businesses that cater to well-heeled consumers are doing well. Therefore, I expect to see a summer global rally next month, with strong earnings acting as the catalyst.
3. Slowing growth in China will tame inflation and end monetary tightening: Recent economic data from China indicates that the world’s fastest growing economy is slowing down.
The Chinese central bank responded to these numbers with a reserve requirement hike to 21.5% for commercial banks in China, the ninth such hike since last October.
So, finally, money is finally becoming tight in China. Private underground lenders in the commercial city of Wenzhou have raised their monthly interest rate to a whopping, usurious rate of 10% a month for non-collateralized loans, compared to just 2% per month early last year.
This money tightening is keeping inflation from rising. I believe that in the third quarter, the inflation rate will dip below 5%, and Beijing will stop further monetary tightening.
As I’ve discussed for some months now, Chinese leaders are intent on making sure inflation remains under control. Policymakers are increasingly focused on the quality of growth, rather than simply quantity, and they are also concerned about the possibility of widespread social unrest.
Even with a slowdown in growth rates, China will still be the world’s fastest growing major economy, with annualized 8% to 9% growth rate in the second half. In this environment, there will still be many sectors enjoying strong double-digit growth, especially in the booming interior second- and third-tier cities.
Right now, investors should position their portfolios for the upcoming summer rally. A good strategy is to use pullbacks to accumulate high-quality China stocks, such as Baidu.com (NASDAQ: BIDU), China’s leading search engine.