On January 31, Marietta portfolio manager Kathy Klein presented an optimistic outlook for global stock
markets to about 90 retirement professionals attending a luncheon sponsored by
the Greater Milwaukee Employee Benefits Council.
Kathy opened with a brief
review of the challenging market conditions of 2011, when a relentless flow of
negative news events convinced many investors that Europe and the U.S. were
headed for a double-dip recession. Most of the world’s stock markets declined:
the All Country World Index excluding the U.S. slumped 13.7% and the leading
emerging-economy markets crumbled more than 18%. The U.S. faired better, not so
much because the U.S. economy was attractive, but rather because it was viewed
as a safe haven in troubled times. Within the S&P 500 Index, the defensive
industry sectors of utilities, consumer staples, and health care were the major
winners, and the biggest losers were the economy-sensitive, cyclical
industrials, materials, and financials.
Kathy then pointed out
that conditions in early 2012 have improved dramatically. The U.S. economy is
accelerating, the European policy-makers seem determined to deal effectively
with their sovereign-debt crisis, and declining inflation in the emerging
economies is permitting their central banks to adopt pro-growth initiatives.
Market trends have correspondingly reversed. Global stock markets, led by the
emerging-economies, have surged. Within the S&P 500, last year’s leading
industry sectors are now the worst performers and vice versa.
The obvious question
posed by this reversal is: can the positive market trends of January extend
through 2012? Here, Kathy emphasized the importance of the current synchronized
global accommodative policies of central banks. It was just such a synchronized
global stimulus that was the most important catalyst in lifting the global
economy out of the recession of 2008-09 and triggering a new bull market.
Kathy also noted that in
many leading global markets the fundamentals and technicals are positive. Time
did not permit her to explore these conditions in all of these markets, so she
limited her discussion to the U.S. market. In particular, she identified nine
indicators which historically have been associated with bull markets. These
included GDP growth, strong corporate balance sheets, compelling valuations,
subdued inflation, low interest rates, an accommodating Fed, and large cash
reserves.
A very interesting and
relevant observation made by Kathy was that sluggish GDP growth of 2-3% in the
U.S. should not necessarily lead investors to conclude that prospects for U.S.
stocks are at best modest. To the contrary, since 1960 periods of
weak-to-moderate growth have provided the best S&P 500 gains.
Key to Kathy’s positive
case for the U.S. market is continuing profit growth coupled with a very
attractive valuation. A high-single digit profit gain in 2012 by S&P 500
stocks in combination with P/E multiple expansion to a non-recession level
could produce a solid, double-digit advance for this benchmark index. P/E
valuations for the international markets are even lower, and the prospect of a
very considerable market advance in the emerging markets is pronounced.
Kathy pointed out that
negative news events could again upset the positive case, but concluded with
Marietta’s 2012 upbeat investment recommendations:
1.
Be open to the positive case for equities
2.
Take a longer-term view (avoid excessive
responses to headline news)
3.
Adopt a global perspective (take advantage of
international opportunities)
4.
Watch for risk-on, risk-off decoupling
5.
Beware of macro investing (watch the policy
makers)
6.
Track closely the fundamental progress of your
securities
