Why the Indices Are About to Stop Rising

While the key stock indices might be giving the impression that everything is fine with the global economy, the reality is far less optimistic.

The global economy is actually standing on the verge of a severe economic slowdown that could wipe out the wealth of many investors. Now is a great time to be careful.

The four biggest economic hubs in the global economy are going through a period of slow growth or are in an outright economic slowdown. And wise investors know that when the big movers in the global economy witness an economic slowdown, the small nations will follow. That will eventually result in widespread turmoil in the stock markets.

The U.S. economy, the biggest contributor to global output, is in a period of stagnant growth. In fact, I consider it to be on the borderline of an economic slowdown. The unemployment in the country remains very high, the consumer spending numbers are dismal, and the number of people using food stamps continues to increase.

And the Chinese economy, the second-biggest in the global economy and often referred to as a “powerhouse,” is experiencing an economic slowdown like it has never seen before. Exports from the Chinese economy to the global economy witnessed their slowest growth rate in a year, and the factory activity in the nation dropped to a nine-month low. (Source: CNBC, June 26, 2013.)

The Chinese economy is expected to grow at a very slow rate compared to its historical average, and the credit problems there continue to undermine its financial system. I worry that the credit crisis could send even bigger problems to the global economy.

And the Japanese economy, the third-biggest contributor to the global economy, has been in a continuous economic slowdown despite rigorous actions taken by its central bank.

According to the Japanese government’s cabinet office, sentiment in the service sector declined in June. The index for “economy watchers”—those who are closest to the economy in Japan—fell for the third straight month in June to 53.0 from 55.7 in May. (Source: Reuters, July 8, 2013.)

Even Germany, the fourth-biggest contributor to global output and the biggest economic hub in the eurozone, is also showing signs of an economic slowdown. In May, the industrial output in Germany dropped the most since October by twice what was forecast.

The production fell one percent for the month, with capital goods plummeting 2.3% and output from construction falling 2.6% in May. (Source: Reuters, July 8, 2013.)

As I continue to point out, the troubles in the global economy are unwinding, and U.S.-based companies will face more hardship—yes, more than they have already experienced. There’s no rocket science behind it; they do business in the global economy, so as the demand decreases, their profitability suffers.

We are now entering the second-quarter earnings season. Readers of Profit Confidential already know how companies on key stock indices are showing profits—they are buying back their shares and cutting their workforces.

And since we have already seen a significant number of companies on key stock indices like the S&P 500 provide negative earnings guidance, I wouldn’t be surprised to see an earnings growth rate lower than the previous quarter’s, with companies showing more concern about global growth.