Starting from the beginning, I have thought that the US may be in for a period, perhaps a very long period, of shallower economic cycles. This, if it pans out, would be a function of an ever-maturing economy.
I view the some of the bigger economies in Europe to be more mature than the US. Following that thought, economic cycles in Europe tend to generally be quite shallow.
Shallower economic cycles could lead to more muted stock market cycles.
That is the background for this post.
Larry Kudlow continually tells his audience how great things are, he marvels at the economy and the stock market on a regular basis. Is Larry actually capturing the sentiment of the US investing public correctly? That is tough to say.
For a little perspective, the above chart shows that year to date the S&P 500 is up 5%. That is a nice move, no doubt, but the "greatest story never told" or however Larry refers to it? If Larry is accurately capturing investor glee then I have to wonder about muted domestic returns. If plus 5% incites glee it may be a tough hill to climb to have a truly great year.
While the US is up 5% the rest of the world, as measured but EFA, is up more than 15% so why are we so excited, if indeed we are excited?
This has nothing to do with being bearish or bullish. The question is if investors' expectations have diminished in such a way that a 5% move in five months could incite euphoria.
Fortunately for clients but unfortunately for my theory the returns in western Europe have been far from muted.
3 comments:
Looks like another year where the S&P gets money market-like returns while pretty much *any* foreign stock market beats it. I wonder how long this will go on.
I think it depends, to some degree, on how you define "maturity". There's the maturity of the economy as a whole and then there's the maturity of the corporate sector. European companies are still way behind the U.S. in terms of restructuring, M&A activity, outsourcing and other things that have made corporate America leaner and meaner. That might explain why European companies have been able to outperfom despite a sluggish-looking macro picture. This is also just a theory, so I'd be interested to hear what others think.
A plug for Oz:
http://guambatstew.blogspot.com/2006/04/smug-or-mug.html
with caveat:
http://guambatstew.blogspot.com/2006/05/cant-cop-it-any-more.html
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