Are the US economy’s sniffles signs of a cold, or of pneumonia?

Is the US economy catching the cold that’s been gripping the global economy? That’s the concern capturing investors’ attention in recent weeks. The Federal Reserve has retreated, and global interest rates have fallen in unison. The benchmark 10-year Treasury yield has slid 0.3 per cent since the beginning of March, representing its largest monthly yield decline since December when the S&P 500 plunged more than 9 per cent. The yield on the 10-year German Bund has slipped in sympathy, moving into negative territory about a week ago.

Other bits of US data are also helping fill in the slowing scenario mosaic. February’s jobs report indicated employers added 20,000 net new jobs, its worst showing since September 2017. New home sales and housing starts fell short of economists’ forecasts. Perhaps it was FedEx’s outlook warning earlier this month that epitomized the linkage between the US economy and the rest of the world; the company’s shares have shed more than 20 per cent since the end of November.

Despite mounting evidence that the pallor afflicting the global community appears to be spreading here, the recent behavior of investors indicates that, so far, they remain undaunted. Over the last month, investors have ploughed more than $3 billion into international and emerging market equity ETFs. This money was withdrawn from US large caps in the belief that as the US economy converges with the global economy, global equity markets will converge as well. Over the last five years, the S&P 500 has run circles around global equities, outpacing the developed markets by 44 percentage points and emerging markets by 34 percentage points. Investors agree that the US may be catching the world’s sniffles, but the symptoms most likely reflect just a cold – not pneumonia.