Global Stock Markets off to Strong Start in 2012 Led by Emerging Markets

So far this year global stock markets have risen at a rapid pace; extending the rally begun in the fourth quarter of 2011.  Since January 1, the S&P 500 gained 4.5%, a starting year rally not seen since 1987. Over the same time period, the iShares MSCI Emerging Markets Index Fund (EEM) gained 9.1%, the fastest rise since 2001.

Articles in the Financial Times and Bloomberg have noted a pattern in this rally. The biggest decliners last year have led the charge this year. Year to date the EEM, which lost 21.1% in 2011, has gained twice as much as the S&P 500. On a sector basis within the S&P 500, financials, industrials, and materials have been leading the recent rally. These same sectors have greater exposure to emerging markets and were among the worst performers last year. Utilities, health care, and consumer staples had been the best performing sectors in 2011 but have been among the worst performing sectors in 2012.

Economists attribute the surge to a number of reasons:  in the U.S., positive economic data continues to flow, manufacturing is growing, jobless claims are falling, and the unemployment rate is ticking down. Corporate profits remain high and Fed policy continues to be accommodating. Earnings season has begun with 60% of reporting companies beating expectations. Many global central banks are lowering rates in order to promote growth after two years of raising rates. As mentioned in Marietta’s blog Promising News from China, recent events in China indicate that economic stimulus and easing will likely come soon to this engine of global economic growth.

Three weeks do not make a year, but a continuation of current trends could result in 2012 being dramatically different from 2011.

Promising News from China

On January 17, China announced that its economy expanded 8.9% year over year in the 4^th quarter. The news triggered a 4.9% jump in the Shanghai stock market, which was the largest single session gain since October 2009. On this news, the U.S., European and other global markets also rose.

The 8.9% GDP growth is the slowest advance in 10 quarters and is attributed to slowing export demand and a weakening property market. This increases the pressure on Premier Wen Jiabao to ease monetary policy, which would be viewed by investors as a strong positive for the Chinese stock market. On the other hand, the 8.9% was above the 8.7% median estimate of a consensus of economists, and well above the 8% that policy makers consider necessary. This supports the argument that the Chinese economy will experience a “soft landing,” which would also be very positive for the Chinese and other global stock markets.

A “soft-landing” in China and other leading economies is very important to the positive economic and market forecast presented in our January 3 Outlook. Emerging economies now account for 50% of the world’s GDP and approximately 70% of GDP growth. Healthy and sustainable growth in the Chinese economy is thus necessary for a global economic expansion requisite to support a resurgence of international markets. The news is very promising, but not decisive.