Related topics: stocks, emerging markets, Brazil, jobs, Jim Jubak
For months I've been saying I think the U.S. stock market will be the best-performing stock market in the world for the first half of 2011. And so far the U.S. stock market has obliged.
In 2011, as of March 4, the iShares MSCI Emerging Markets Index (EEM, news), for example, was down 1.2%. Brazil's market, as measured by the iShares MSCI Brazil Index (EWZ), was down 2.18% for 2011. The iShares FTSE China 25 Index (FXI), among the best-performing China indexes, was up only 0.81%. By contrast, the U.S. Standard & Poor's 500 Index ($INX)was up 5.4% for 2011.
No contest.
More recently, I've also warned that while I think the outperformance of the U.S. market is likely to continue for a while, it's no time to get complacent. (See my Feb. 8 post for more on this topic.)
And today I'd like to go one step further and say it's time to think about strategies for rotating out of U.S. stocks and into emerging markets again. It's absolutely too early to execute them -- May would be about right, I think, for small exploratory moves -- but it is absolutely time to plan this rotation and think about what to buy and what to sell.
Correction ahead?
What has pushed me to this next step?
Jim Jubak
There's evidence that expectations for the U.S. economy and U.S. stocks are starting to run ahead of reality. When that happens, a stock market is setting itself up for a fallow period, or even a correction, as economic fundamentals catch up with stock prices. In other words, the result is likely to be a period of U.S. underperformance.
And there's evidence that expectations for at least some emerging economies, and for stocks in those emerging markets, are sinking like a stone. When that happens, a stock market begins building a base from that low level of expectations before moving up as expectations improve. In other words, these markets are looking at a future period of outperformance.
The reaction to the March 4 U.S. jobs numbers is a good indication of how expectations are starting to run ahead of actual economic performance in the United States.
First, let's look at what the data said about the economy. According to the Bureau of Labor Statistics, the U.S. economy added 192,000 jobs in February. Economists had forecast an increase of 185,000, according to Briefing.com. The private sector actually did even better, adding 220,000 jobs in February. All this was enough to bring the unemployment rate down to 8.9% from 9.0% in January. The full unemployment rate, which includes potential workers who have stopped looking for employment and workers in temporary jobs who would like permanent jobs, declined to 15.9% from 16.1%.
But that was the extent of the good news. Layoffs from state and local government budget crises cut 30,000 jobs from the gains in February, and a monthly drop of 30,000 government jobs seems baked into the U.S. economy through June, when many states end their fiscal years. Adding jobs at a monthly rate of 192,000 or so isn't enough to reduce the unemployment rate by more than a tiny margin. For that, we need growth north of 250,000 jobs a month. With governments shedding 30,000 workers a month, it's going to be really tough to get to that 250,000 figure.
The news about incomes was also discouraging. Income growth was nonexistent for the month. The average workweek was unchanged at 34.2 hours, and average hourly earnings rose just 1 cent in February. (For the past 12 months, average hourly earnings are up just 1.7%.) An unchanged workweek plus unchanged hourly earnings? That math is easy: It equals stagnant incomes.
And that's bad news for the economy at a time when the costs of gasoline and food are rising. The price of gasoline, for example, climbed 8.8% in February to a national average of $3.17 a gallon, according to AAA. If incomes are stagnant and food and gas costs are rising, consumers have that much less to spend on everything else. That's not a recipe for faster economic growth.
The headline in the March 5 Financial Times? "Strong US employment figures raise hopes for sustainable job creation."
Huh? Do you see that in the March 4 data? I don't.
But Wall Street apparently does. And that view is at least partially priced into stocks.
What the numbers show
U.S. stocks, as measured by the S&P 500, have almost doubled -- to 1,321 as of the March 4 close -- from their Great Recession 676 low in March 2009. That surge has been built on the recovery in the U.S. economy and in corporate earnings. Earnings have grown fast enough that the price-to-earnings ratio for U.S. stocks has actually fallen for most of the rally. From a price-to-earnings ratio of 18.6 in 2009, the P/E for the S&P 500 fell to 15.5 in 2010, according to Morningstar. Despite their huge rally starting in 2009, U.S. stocks were actually cheaper in 2010 -- on the basis of trailing earnings per share -- than they were in 2009.
