How likely is it that Europe and China will seem less risky over the next few months? Notice the exact wording of my question. I'm not looking for an actual solution to the deep-seated problems of the European currency union or a rebalancing of the Chinese economy and reform of the Chinese banking system. Instead I'm trying to gauge whether we'll see temporarily convincing short-term moves that raise confidence in those two economies.
And the answer to the question, when it's phrased that way, is that an increase in short-term confidence is likely in the next two months.
Optimism on Europe, China
November is likely to bring a formal request from Spain for the European Central Bank to start a program of buying Spanish government debt, as well as a disbursement of the next payment of cash to the Greek government from the European rescue fund.
Neither of these acts will solve the eurozone debt crisis in the longer term. I think Greece will need another write-down of its debt sometime in 2013, and this time the ECB will have to swallow the bitter medicine and participate in the write-down. And I think bond-buying support for Spanish government debt won't significantly add to Spain's economic growth; reduce the country's horrific unemployment rate; save its regional governments from what amounts to bankruptcy; or make the huge amounts of bad real-estate debt disappear from the balance sheets of Spanish banks. All these efforts will do is buy time.
But -- and this is the crucial aspect, from an investor's point of view -- November's actions will reduce fears that the eurozone is about to blow up and that Greece and/or Spain is about to be thrown out of the club and into international default. That may not bring cash flooding back into European assets -- the eurozone economies will still be near recession levels of growth -- but it will be enough to reduce the demand for U.S. assets as a hedge against a European disaster.
China is in an analogous position. Its financial markets have rallied in the past six weeks on a belief that the third quarter marks a bottom for China's economic growth rate. Recent weeks have brought retail-sales, export and money-supply numbers suggesting that August may have been the low and that September has brought a modest recovery. The fear of a hard landing for China's economy will recede as long as we don't get data that turn current hopes into disappointment.
What's the effect of all this on the markets?
- The dollar weakens against the euro. That's good for commodity prices, which are likely to move up on hopes for Chinese economic growth. It also leaves room for gold to advance on a decline in the U.S. currency and fears over the U.S. fiscal cliff.
- Emerging-market stocks will look more attractive as fears that the eurozone debt crisis will blow up ease, temporarily, to a simmer from a boil.
- China stocks in particular and emerging-market stocks in general should get a boost as fear of a Chinese hard landing diminishes and as hope rises that China's growth rate has bottomed.
- Better-than-expected economic growth in the United States will, of course, improve the prospects of U.S. stocks. But to investors who fear the U.S. fiscal cliff, non-U.S. companies that export to the United States might be a better way to play this extra growth.
How scary is the cliff?
The exact way this plays out across global markets depends largely on how scary the U.S. fiscal cliff starts to seem.
If it's very scary, I think we'll see a continuation of the recent trend of most markets and assets moving together. If the U.S. looks like it's headed off a fiscal cliff, I think it will be hard to imagine other markets moving up. The one asset I'd expect to do well in this scenario is gold, which would rally on fear and the fall of the U.S. dollar.
If, however, the U.S. scenario is only moderately scary, I think we will see some markets move out of strict correlation. A moderately scary crisis is enough to make investors think about whether the potential of a 9.2% gain in U.S. equities (that's the distance to the 1,565 top of 2007 from the Oct. 19 S&P close of 1,433) makes up for the risk of a credit downgrade, a fiscal logjam in Congress or an irresponsible compromise that rattles credit markets. When the bullish analysts on Wall Street are offering you only a 9.2% potential gain from current prices, it doesn't take much fear to make the offer unattractive.
And in this case, emerging-market stocks would make an attractive alternative -- if growth in China looks like it has stopped tumbling. Certainly the potential upside is more attractive. The Shanghai Composite Index is down 38.1% from July 2009 and down 63.2% from its November 2007 high. That's enough potential, if macro trends don't make any risk look too risky, to make China and other emerging markets attractive in any less-than-really-scary global scenario.
The moves to make
In practical terms, what does that suggest you do?
Check your portfolio's exposure to gold and other precious metals. Gold has done reasonably well this year, with the SPDR Gold Shares (GLD) exchange-traded fund up 9.86% as of the close on Oct. 19. But that does trail the S&P 500 so far this year (up 15.96%). I think those relative performances could reverse in 2013, with gold leading the S&P.
I don't think you need to move out of all your U.S. positions by any means. But I would concentrate on sectors that show some ability to outgrow the general U.S. economy right now. Two I'd suggest:
- Housing and housing-related stocks, which are big beneficiaries from the Fed's newest round of quantitative easing.
- Technology shares, which have been battered by bad earnings news from PC sector leaders Intel (INTC) and Microsoft (MSFT). (Microsoft publishes MSN Money.) This week brings a quarterly earnings report from Apple (AAPL), which will go a long way to determining the near-term chances of a technology rally.
A little further down the road, check to see how scary the U.S. fiscal cliff crisis seems to be. The scarier it is, the more you should look for safety in your U.S. stock portfolio. I'd look to dividend payers and consumer stocks, especially if they've been crushed lately, like McDonald's (MCD) was last week.
At the same time, I'd be slowly adding positions in China, Brazil and other emerging markets. My column "4 good (and 5 bad) China stocks" gives you some suggestions on stocks to look at and how to stage any buying in that market. I'll be taking a similar look at Brazil in the next week or so.
Updates to Jubak's Picks
These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:
- Abbott, Bristol-Myers race for hepatitis cure
- Banking investors cheer Citigroup results
- Stillwater shares recover as strike settles
- Why Xylem is looking better
- Price worries in the rare-earth markets
- Nestlé benefits from China wage increase
- Apple's hidden competitive advantage
At the time of publication, Jim Jubak did not own or control shares of any of the companies mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. The fund did own shares of Apple and McDonald's as of the end of June. Find a full list of the stocks in the fund as of the end of June here.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
Click here to find Jubak's most recent articles, blog posts and stock picks.
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VIDEO ON MSN MONEY
There will be a last minute agreement like last year that nobody is really happy with.The
congress is noy going to miss their well deserved Christmas vacation.I`m sure that`s
what everybody is worried about.
What ever you're smoking I'd like to get some!
So we are betting that Politicians won't be so stupid? Holy smokes, I need more Guns & Gold, Lemme see, how stupid can politicans be? They steal Postage! They jump in the Yaught Basin with hookers, They grab the leg of the guy in the next toilet. They declare that a **** is not sex and they did not have sex with that women. They think there are 57 States. Here, in Jersey they crash cars at High speed and have sex with truckers at the NJ Turnpkie rest stops.
C'mon Jim, Politians can be plenty stupid, and when time runs out and they can't kick the can any further down the road and the can falls over the fiscal cliff, I think we are going to see records set in Stupid that belong in the Guiness Book of Records.
In the mean time I'll stick with Gold & Guns, as well as quality stocks paying increasing dividends covered by earnings in Oil, Commodities, Food, Water and a wee bit of Tech.
We are going off of the cliff and that will not be so bad. It's the landing that will kill us.
In recent days, you might have noticed that Wall Street analysts have been raising their predictions for 2013.
TRANSLATION: Christmas/end of year is coming and I want to increase my bonus.......and you know I wouldn't lie right??
It's the normalcy bias so obvious in these "fiscal cliff" scenarios that I find amazing. Always told from the standpoint of "If I tell a lie, may God strike me dead." Well, we all know how that ends up.
God's existense has become a straw man argument.
Even if you get away with it, like this country has by not addressing the real problems. The problems don't go away, the consequences of not dealing with them just gets worse. This is because things do change whether you're inclined to worry about things actually getting worse or not.
Mr. Jubak here says how the U.S. will not be facing anything like a "Thelma and Louis" event if our dysfuntional government really does take the country over some "fiscal cliff." That attitude was not okay the first time, when the country still had a AAA credit rating. That attitude is even more inexcusable with the truly untested AA credit rating the coutnry now has. If you don't live responsibly, sooner or later, lightning does strike back.
Every American has seen this happen at least once in their life, even after abject apologies for almost destroying the country have been offered, and promises that the same thing will never ever happen again are made. The truth is that the country hasn't learned anything. And what about the lightning? It's on the side of Thelma and Louis.
When articles about China are outlawed, only outlaws will have articles about China.
I just finished George Carlin's memoirs "Final Words." All things considered, I'm inclined to drink myself to death.
We may have democracy, or we may have wealth concentrated in the hands of a few, but we can't have both.
KOO: Why in the world bring the wives into it??? Can't you stick to the issues or do the issues impact your choice of president negatively? And the only thing you can come up with is diss the wives? Pretty shallow and desperate thinking IMHO.
AS LONG AS RATES ARE AT ZERO SO WILL GROWTH.
THE RATES ARE NOT LOW FOR JOB CREATION.
THE FED'S BANKER BUDS LIKE IT THIS WAY!
TEN YEAR'S OF CHEATING SAVERS HAS CUT SPENDING THAT DRIVES OUR ECONOMY.
SENIORS HAVE SPENT THEIR PRINCIPLE / THEY WILL NEVER GET IT BACK / THEY WILL NEVER SPEND LIKE THEY WOULD.
THIS IS THE COST OF CHEATING THE SYSTEM WITH THESE UNGODLY LOW RATES.
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[BRIEFING.COM] S&P futures vs fair value: -5.50. Nasdaq futures vs fair value: -11.80. U.S. equity futures continue holding modest losses with the S&P 500 futures down six points below fair value.
The Dollar Index began the night in the red after gaining 0.6% last week, but a steady rally off the lows has placed the index back near its flat line for the session. The dollar is currently little changed versus the yen (109.05), while the euro (1.2844) and the pound (1.6330) ... More
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