It may come as a bit of a surprise but in the end developed market stocks did quite well last year. For one thing, they outperformed the much-touted BRICs (Brazil, Russia, India and China). Here is the graphic to show it.
For all the doom and gloom associated with the broader economy—historic unemployment in the United States, debt woes and mandated austerity in Europe—it’s been a remarkably positive year for the stock market. As we enter the last week of 2010, the S&P 500 index is up nearly 13 percent for the year. That’s far from a record (1954 witnessed a breakneck 45 percent rise), but at least the index this year climbed above the level hit before Lehman Brothers declared bankruptcy in September, 2008. The stock comeback story is not unique to America, either; this week, Korea’s stocks hit their highest level in more than three years.
At one time, the gurgling stock market would have been a fairly reliable predictor for a healthy economy in the near future—and who knows, that may still be the case. More bearish observers point to artificial stimulants, like an unsustainable commodity bubble and the Fed’s quantitative easing policy.
Regardless, a lot of equity holders will be popping Champagne (or prosecco) this week. Our chart below shows the top ten performers in the S&P 500 for the year—so what does it tell us? Well, the best-performing stock of the year is Cummins Inc., an Indiana-based company that makes power generators and diesel engines. Not surprisingly, its strong market performance this year is based on healthy sales abroad, particularly in emerging markets enjoying the rise in commodity prices. Another top performer has been AIG, the once-mighty insurer which lost nearly all of its value in 2009 but has made a strong comeback thanks to a massive taxpayer bailout. Two other financial firms that also flirted with the abyss made the top ten.
Can nature’s cycles enrich our finance and market theories?
Market predictions based on the alignment of the sun, moon and the earth and other cycles could help investors stay disciplined and profit in economic storms, says Daniel Shaffer, CEO of Shaffer Asset Management.
Shaffer writes that sunspot activities show that the sun has an approximate 11-year cycle and as of March 31, 2009, sunspot activity has reached a 100-year low (this, interestingly, coincides with a cycle low in equity markets, reached sometime mid-March in 2009).
But a low in solar activity seems to be followed by a high. Scientists are predicting a solar maximum of activity in sunspots in 2012 that could e the strongest in modern times, according to Shaffer.
Proof that a little surprise can be quite big.
Ahead of the Federal Reserve’s decision on more quantitative easing there were three possible outcomes that could have threatened what is becoming a strong global equity rally. In short:
– Meeting expectations could have been seen as boring, leading to a sell off
– Not meeting expectations could have been seen as widely disappointing, leading to a sell off
“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell,” wrote late billionaire investor and philanthropist John Templeton in 1994.
Investors might have done exactly that. After hitting a trough in March 2009, world stocks have gained 83 percent, with many analysts and investors saying that the rally may have further to run.
But with valuations becoming less attractive compared with the absolute trough last year, what should investors buy now?
No question that investors are in the throes of passion over emerging markets. The latest Reuters asset allocation polls show investors pouring money into Asian and Latin American stocks in October to the detriment of U.S. and euro zone equities. Exposure to equities in emerging Europe, Asia ex-Japan, Latin America and Africa/Middle East rose to 15.6 percent of a typical stock portfolio from 14.3 percent a month earlier.
Interesting twist at the moment – how are financial markets going to view not-so-bad or good data out of the United States in the run-up to the next Federal Reserve meeting.
Investors have been pricing in a chunky operation by the Fed to feed the markets with cheap cash – look at the gold, silver, the Australian dollar and the Canadian dollar. Bad data from the United States will keep investors confident of such Fed action and support the flows into high yielding assets.
But any data showing the pace of recovery in the world’s largest economy is not in such a bad shape. Investors will adjust their expectations and positions, causing a sell-off in equities, speculative-grade credit and high-yielding currencies.
Reuters asset allocation polls for August are out. They show very little change from July, which suggests investors are still cautious and uncertain about what is happening.
One big difference, month-on-month, was a large jump into investment grade corporate debt. Andrew Milligan of Standard Life Investments reckons this may in part have been because sovereign debt rallied so much over summer that returns from government bonds are now too meagre.
Here is the big picture:
The U.S. earnings season is over bar a handful of firms. It has been robust to say the least: Thomson Reuters Proprietary Research calculates that S&P 500 companies overall had second-quarter earnings growth of 38.4 percent. That was 11 percentage points higher than people had been expecting heading into the season.
There may be more surprises ahead -- although which sort, remains in question. The research suggests that analysts still expect solid growth in the coming quarters and that the decline in U.S. economic strength over the summer has not changed their minds much.
Third-quarter earnings growth is estimated at 24.9 percent, down slightly from July estimates but higher than earlier in the year. Fourth-quarter estimates are at 31.8 percent.
There is little doubt that the latest U.S. earnings season has been a good one for long-equity investors. Thomson Reuters Proprietary Research calculates that with 67 percent of S&P 500 companies having reported, EPS growth -- both actual and that still forecast for those who have not filed yet -- has come in at 36 percent.
Furthermore, a large majority of the reports have surprised on the upside, as they like to say on Wall Street. Some 75 percent of reports have been better than expected. Not surprisingly, the S&P index gained around 6.9 percent in July and is up another 1.7 percent in the first two trading days of August.
But given what looks like at least a faltering U.S. economy with little consumer confidence, some analysts have begun asking what there is to get excited about. Philipp Baertschi, chief strategist at wealth manager Bank Sarasin, for example, calls it a case of micro bulls versus macro bears and warns that it won't last.