6 Reasons U.S. Stocks Will Outperform Foreign Stocks in 2008
1. Economics. The U.S. market is roughly 6 months ahead in terms of the housing and banking issues as compared to the U.K. and slightly longer than that over Continental Europe. We have just started to see the BOE begin to cut rates, however, the ECB seems to be much more concerned with inflation at this point rather than any slowdown in growth. I am most bearish on the major exchanges in continental Europe due to the higher interest rates despite significant signs of a slowdown which could lead to a significant slowdown or recession in the region. Japan has been weak economically for many years with brief periods of increased GDP growth which most recently has primarily been due to the strength in China. It is likely that China will slow from its 10-12%+ growth rates of recent years due in part to the slowdowns in the U.S. and Europe and China's attempts to better control growth. China will still likely grow in the mid to high single digits for the year, but this may not be enough to keep their very highly valued stock market at presently high levels.
2. Dollar. Weakness in the U.S. dollar has been a significant tailwind for U.S. investors who are buying securities overseas, however, in my opinion the dollar will climb in value over 2008 (especially in the second half of the year) as the U.S. economy begins once again to gain traction and the European economy falters due in part to limited action by the ECB.
3. Commodities. It has become clear that the U.S. economy is experiencing a major slowdown and potentially a soft recession. The Fed is actively adding liquidity into the marketplace which should allow the slowdown or recession to be mild and short in nature. Typically, the U.S. markets will begin to rebound about 2-3 months prior to the end of the recession. Commodity prices have traditionally been weak in periods of economic weakness as demand for items such as steel, coal and oil is driven lower. Some supply side issues may allow for some precious metals such as gold and silver to continue to exhibit strength, however, in commodities, prices should decline. The most questionable area at this time is commodities related to food as the ethanol boom has significantly increased prices of many food-related commodities over the past couple of years and farmers switch their production to more profitable areas.
4) Valuation. The
U.S. market is now one of the least expensive markets on both a P/E and
P/B valuation in the world. In addition, if the Fed were to cut by
another 50 basis points in the next several weeks, we would be second only to Japan in having the lowest interest rates in the developed world.
5) Mean reversion. In the 5-year period that ended 2/7/08, the EAFE Index was higher by 19.6% on an annualized basis and emerging markets were up 34.3% against a return of 11.9% for the S&P 500 Index.
6) Increasing foreign investment. Over the past few months, we have seen several sovereign wealth funds invest in companies in the United States as they see significant value in many U.S. equities as compared to in other parts of the world.
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This article has 7 comments:
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Will Rahal
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114 Comments
My Website
Feb 11 11:20 AMpessimism prevails. Together with some technical improvement
I expect the stock market to rally shortly.
I have been bearish, but call for a bottom on Jan 22.
and expect this pullback to be done in a day or two.
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Blair
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31 Comments
Feb 11 04:46 PMPoint and figure charts for the Dow, S&P 500 and NASDAQ all count down to that level. Don't know when it will happen, but it will happen.
Has anyone who is bullish read the Wall Street Journal? There was a recent article to the effect that there will be a down rating of Fed Bonds because of the indebtedness. Can you imagine what the market will do if the bond ratings are reduced? Every time you turn around, there is still more spending -- are you for tax increases?
Can you trust anyone in the government anymore? There is no courage around to straiten out the mess, which will bring short term pain, but long term health.
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JohnB
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67 Comments
Feb 12 08:51 PM-
Kunst
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781 Comments
Feb 12 11:17 PMHard to see how that can happen when we are running $700+ billion a year negative in our current account. Supply and demand, you know.
At the same time, we're cutting interest rates like there's no tomorrow. More likely is a serious inflation problem due to the Fed's force-feeding of dollars into the financial system. Lots of dollars sloshing around the world to bid up commodities. Good thing food and energy aren't part of core inflation, huh?
The interesting question is whether the Fed will be forced to raise interest rates at some point, or if the auction market for treasuries will do it for them on the long end. Higher federal deficits are coming, and that means more borrowing of dollars from overseas. Higher interest rates would strengthen the dollar, while magnifying the one thing that for sure reduces our trade deficit: recession. Of course, that might not be good for the stock market.
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CrossProfit
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567 Comments
My Website
Feb 13 06:00 AMThe dollar mess is a catch 22.
If interest rates go up, the cost of financing the already heavy debt burden increases as well.
If by lowering the cost of debt financing, interest rates go down, then investors (private & public, U.S. & overseas) will naturally hold less dollars causing the devaluation of the greenback to accelerate.
If dollar devaluation accelerates, inflation takes hold on a non-reversal basis.
If inflation takes hold due to currency devaluation, a recession doesn't help stem the trend (read your Germany history).
The only solution to this is global co-operation. There can not be another overly attractive vehicle for wealth unless that country is willing to back up its currency by accepting responsibility for the global scene.
In other words, as long as the U.S. is this planet's policeman, the dollar is the world's currency reserve. Should the EU decide that it would like to accept the role of a superpower,they could do so and the Euro can become the new world reserve currency. For now it seems that the EU would like to accept the challenge but is still unwilling to commit the resources necessary to do so successfully.
Until then, expect the co-operation of the G7 (or G8) though at times some may appear to be reluctant participants.
Global interest rates will follow the U.S. lead, up and down and all around.
CrossProfit
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Kunst
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781 Comments
Feb 14 12:41 AMI think the only real solution is for America to start living within its means, which requires a lower standard of living on average than our current debt-fueled approach.
The cost of being the world's policeman is (when you add up all the hidden and deferred pieces) roughly a trillion dollars a year. That has a great deal to do with our long-term economic decline.
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lep
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20 Comments
Jul 04 11:52 AMBasically, debt is a disease and we have seen very few signs over the last decade that would indicate we are curing the illness. With
crude oil now at $145 per barrel, you can buy a pickup truck at 40% off. You can still buy a car for 0-0-0 (zero down, zero interest, no payments for a year). While the final effect of write downs from the housing bubble burst has yet to be seen, it has become more difficult to take out a mortgage loan -- so some fixes have taken place.
For the dollar devaluation, because of national debt and our incurable debt disease, the dollar will probably lose out to the Euro or the Chinese Yuan eventually as the fiat currency makes the West to East transition. If gold becomes part of the equation in the new global fiat currency, then the current bet (over-valuation in commodity prices) that the true value of gold (silver) is realized will become true. Currencies over the long term, however, go up and down reaching an eventual zero sum gain. At this point, it will likely be better to have significant capital offshore in growth equities that are not pegged to the dollar. When retirement approaches, you can exchange your foreign equities for foreign currencies and high paying dividends from, say, US utilities.