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.