Sunday, July 29, 2012

U.S. Stocks in the 2012 Equities Winner's Circle So Far ... American Exceptionalism at Work or a Temporary Phenomenon?

U.S. companies are clearly "overachieving" compared to the rest of the world's companies this year.

The U.S. economy is as well by being the best house in a bad neighborhood. We're operating pretty much at "stall speed," but at least we're not on the cusp of a recession.

And year-to-date the U.S. stock market has put in a very strong performance, too.

And much of this U.S. outperformance can be attributed to a stronger U.S. dollar after many years of weakening.

Lower oil prices, commodity costs and enhanced U.S. consumer purchasing power are just a few of the benefits we're deriving from having a stronger U.S. currency.

Add in record low interest rates, and things are in pretty good shape right now for us.

Of course, all the foregoing is merely "yesterday's news." What's Ahead?

Putting things in a global context, Exceptionally Fortunate makes a compelling case for continuing to own U.S. stocks over the long term:

"The concept of "American exceptionalism" has re-entered heavy rotation in the news cycle . . . .

Less discussed is the starkly exceptional performance of American equities, compared with most other world stock markets, and the question of whether it will continue. Following the late-week buying and short-covering spree that lifted the S&P 1.7% last week, to 1,386, only about 2.3% off its 2012 high, the benchmark is up 10.2% in 2012. This is among the best runs of any major market, with the EuroStoxx index off fractionally in euros and more than 5% in dollars, thanks to the U.S. currency's strength. Japan is flat, China is slightly underwater, Brazil's sitting on narrow losses.

Clearly, scared capital is migrating to where it expects to be treated less badly, and the U.S. markets are so far soothing it as best they can, as are other perceived stable venues such as Germany (without which the Europe index would be dramatically lower) . . . .

The rotation benefiting America is part of the global surge in stability-seeking and defense-playing. And why not, given the well-capitalized, liquid, easy-to-understand profile of U.S. multinational blue chips? Also, America is really the only country with domestically geared companies both somewhat buffered from global capital markets stress and big enough for a global investor to own.

This is so intuitive and logical that it has encouraged a "Where else are you going to go?" sort of backhanded rationalization that should prompt the forward thinker to ask whether U.S. outperformance has nearly run its course. After all, the euro-based investor now sitting on a 15.9% year-to-date gain in an S&P 500 index fund probably feels much smarter than the market likes its minions to feel for long.

If last week's little spurt in equities, following a succession of signals from central bankers that their money-printing fingers were getting itchy is the start of another "risk-on" phase, then beaten-down foreign markets will likely regain ground on stateside blue chips, as they did in Thursday's powerful bounce. It's by no means apparent yet that such a risk-preference shift is about to occur, but the odds are higher than they were a week or a month ago.

In the crisis-pocked terrain of the past few years, determining where capital is treated best also involves deciding which central banks are supportive of growth and of palliating debt-stricken financial markets. This generally has meant the U.S. . . .

Have central bankers, along with hedge-fund managers and market commentators, figured out that in the past two Augusts, markets foundered on global slowdown fears and the concern that sovereign-debt contagion would escape the authorities' reach and grasp? Does this mean that central banks will try to head off another late-summer struggle, rather than wait for one?

Impossible to say. But this notion is giving pause to investors positioned for a straight rerun of last year's punishing market action."

My Take

August is only one month, and nobody knows what the market will do in any month, let alone in any single year or even two. In the last two years, August has been a very rough ride for individual stock market investors.

This year may or may not repeat this sorry stock market performance. July's unemployment report will be forthcoming this Friday, and throughout the month other market moving data and commentary from Europe and the U.S. political campaigns will likely send the market in different directions on several days. Then it's on to September and the rest of the year before 2013 hits. It's always something.

Of course, the upcoming U.S. elections will keep us in suspense as will the "tax cliff" negotiations in Washington, both prior to and after November's elections.

Summing Up

All that said, the U.S. economy is doing a bit better than most others in the world, and the dollar's recent strength and low interest rates should bode reasonably well for future consumer spending.

Add in the likelihood that housing may have reached the bottom, and we are poised to continue slow but steady progress in the U.S. economy. Nothing great, for sure, but no disaster ahead either.

So while there can be no guarantees that we won't have another recession soon, it's not the most likely outcome.

Accordingly, my view is that even though nobody knows what's going to happen in the short term, the probability is that our economy will improve in the months and quarters ahead.

Those are good enough odds for long term investors to choose to "stay the course" and stick with stocks in August and beyond, assuming we mentally can handle the ups and downs of a volatile market.

And if we can't handle the volatility and still sleep well at night, we shouldn't invest in stocks in August or any other time.

I'm in for the long haul.

Thanks. Bob.

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