U.S. stocks are outperforming again at the start of 2012--but it's not just a replay of 2011

01/09/2012 2:39 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

Have we been here before?

It feels like those days in 2011 when the U.S. stock markets were the best performers in the world. But this isn't just a replay of 2011. There are significant differences.

In 2011 U.S. stock markets beat all the other major markets in the world.

The overall absolute performance for 2011 wasn’t all that great: The Standard & Poor’s 500 Stock Index climbed just 1.2%. But the relative out performance was stunning: For 2011 emerging markets (as tracked by the iShares MSCI Emerging Markets Index (EEM)) was down 18.8% and the world’s other developed markets of Europe and Japan (as traced by the iShares MSCI EAFE Index (EFA)) was down 12.2%.

This January looks remarkably similar so far. Europe has continued to sink—iShares EAFE is down 0.77% for 2011 through January 6. Emerging markets are doing better with the iShares EEM up 0.75%. But the U.S. Standard and Poor’s 500 is up 1.76%.

The driver for the out performance of U.S. stocks in 2011 was been the ability of the U.S. economy to exceed expectations. While projections for growth in the EuroZone and in emerging economies have been falling, U.S. economic data, while not in absolute terms all that great, have exceeded expectations. Job growth of 200,000 in December may not be enough to cut unemployment significantly (especially when you factor in the 40,000 or so seasonal jobs delivering packages at FedEx and UPS that were added in December but will get subtracted in January), but it did beat consensus expectations of 150,000 net jobs for the month and the November figure of 120,000 jobs.

Economists have expressed worries that while U.S. economic growth will come in at 3.5% or so in the fourth quarter of 2011, it will drop back to 2% in the first quarter of 2012.

Investors, however, have been more than willing to overlook those reservations to ride the hot momentum hand in the first week of 2012. For example, home building stocks, one of the most battered groups in 2011, are among the best performers of 2012 so far. And the more battered a stock was in 2011, the bigger the gain in 2012. DR Horton (DHI), for example, was up 6.96% in 2011 and it’s up another 2.93% in 2012 through January 6. But PulteGroup (PHM), which was down 16.09% in 2011, is up 12.52% in the first days of 2012.

And it’s this speculative optimism that makes the first days of 2012 different from the relative out performance of 2011. Wall Street analysts have turned decidedly negative on earnings as we begin earnings season with fourth quarter forecasts now calling for just 6.9% year-to-year earnings growth and an even skimpier 3% forecast for the first quarter of 2012.

For the rally that has begun 2012 to have some legs, we’ll need to see some other sectors to add their bit to the housing-generated momentum. Technology is the best chance. Today momentum favorites F5 Networks (FFIV) and Broadcom (BRCM) are up 4.3% and 2.8%, respectively, as of 2:15 p.m. New York time. (F5 Networks is a member of my Jubak’s Picks 12-18 month portfolio http://jubakpicks.com/ .)

If other momentum plays join in, this rally might run for a while, but rallies built on momentum make me nervous. They tend to end dramatically—if the momentum doesn’t get support from economic fundamentals.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. F5 Networks is a member of my Jubak’s Picks 12-18 month portfolio http://jubakpicks.com/ . The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares in F5 Networks as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/



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