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For Now, the Money's Made in the USA
03/19/2010 10:37 am EST
Over the longer term, investing opportunities will be better elsewhere, but in the next few months, the US market should lead the globe. Here are three ways to play the home game.
I can think of a dozen reasons why, in the long term, US stocks will do worse than stocks in China, Brazil, India, and Canada—and maybe even in Norway, South Africa, Germany, and Turkey.
Huge government debt, highly leveraged consumers, underinvestment in infrastructure, a lagging education system, rising interest rates, a small and—in industries such as autos—uncompetitive manufacturing sector, out-of-control health care costs…do I need to go on?
But in the next three to six months, I can't think of a better stock market in the world for my money. China? Beijing is raising interest rates and shrinking the money supply. Brazil? It's looking at rate increases, too, and all the uncertainty that comes with a close presidential election. India? Interest rates and inflation are both due to climb.
In contrast, the US looks like it's in for stable interest rates, inflation just high enough to take worries about deflation off the table, and easy year-to-year corporate earnings comparisons with the first half of 2009.
Hey, I still think there's plenty of bad news coming our way in the fourth quarter of 2010 or early in 2011, but in the short run, the US stock market looks, comparatively, like the best bet in the world for equities. I'm not saying the US market and economy are perfect or wonderful—just that for this period, they look better than the other guys'.
Conditions aren't so fabulous that I want to go out and bet the farm on US stocks, but they are good enough that I might want to add a dash of US stock to my portfolio for the next quarter or two. I'm not going to tear up my long-term plan to overweight developing market equities, though. Over five to ten years, I think stocks from China, Brazil, and the rest of the developing world will leave US stocks—and stocks from other developed economies even more so—wallowing in their dust. But US stocks are attractive enough in the short run that putting some cash to work there makes sense.
After my sell of GulfMark Offshore (NYSE: GLF) on March 10, Jubak's Picks is up to 14% in cash. I'm going to put some of that to work with a buy at the end of this column. And I'll give you two more potential buys if your portfolio has more cash on the sidelines than mine does.
Think Long, Act Short
One of the lessons that the bear markets of 2000 and 2007 should have taught us is that investors need to think both long and short term. It's not enough to put your money behind a great long-term stock and then forget about it, lulled into complacency by a belief that in the long run, your investments will do fine. In the short run, we've learned, even the best long-run stocks can take beatings so horrible that most investors can't hold on for the turnaround.
Google (Nasdaq: GOOG), for example, is a great long-term investment. But that doesn't mean you could just buy and forget about it in the past five years or so. Look at this volatility:
- On September 30, 2005, Google sold for $316 a share
- By October 1, 2007, it was at $583, and you were up 84%
- By November 24, 2008, it was down to $257, and you were down 56% from October 2007 and down 19% from September 2005
- On March 16, 2009, the stock was back to $565. And an investor was up 120% from November 2008, down 3% from October 2007, or up 79% from September 2005
I'm not saying that you had to trade Google during these market ups and downs in the hope of catching the tops and bottoms. But you sure could have used tools as time-honored as dollar-cost averaging, which would have led you to buy more shares when they were cheap and fewer when they were expensive. Growth at a reasonable price would have guided you to sell some of your position when the stock was trading at a high price-to-earnings-to-growth ratio and buy when Google's growth was relatively cheaper. Or good old portfolio rebalancing (to trim big positions). Or by-the-book portfolio diversification (to keep the asset classes you own in balance). Or even some macroeconomic timing (to sell when the economy for advertising, Google's main product, soured and buy on prospects for recovery).
Feeling like you can't do anything that matters leads to panic and then, frequently, to selling in despair at the bottom. If your strategy does nothing more than help you hang on in the short term through volatility so you actually reap long-term rewards, then that strategy is working for you.
That's especially true with a market like this one that's constantly setting out the punch bowl and then taking it away. The short-term rallies and reversals, the head fakes and the bear traps are enough either to drive you out of the market because it's just too frustrating or entice you into gradually taking on more risk than you should out of frustration.
Oddly enough, I think focusing some attention and a little bit of money on the short term is exactly how you can keep from blowing up your long-term strategy out of frustration. (I suggested this same kind of short-term/long-term thinking for income investors in my March 5 column, "Is there anyplace to put your cash?")
How frustrating is this stock market right now?|pagebreak|
Think about 2009, when everybody was saying that China's stocks were the great long-term growth story of our time. (I agree…mostly. I do prefer some other developing markets to China, but China is, in my opinion, an amazing growth story for the next decade or two. For a look at the countries I prefer to China, see this February 5 column.)
And this year? Blah! (A highly technical financial term. Sorry to use jargon, but sometimes it's necessary.)
The iShares FTSE/Xinhua China 25 (NYSE: FXI) exchange traded fund, which tracks 25 of China's biggest companies, was down 5% for 2010 as of March 16. The Shanghai Composite Index was down 9.2% for 2010—and that's after rallying from its February low.
And the much-reviled and, over the long term, perhaps justly scorned US stock market? The Standard & Poor's 500 Index was up 2.3% for the year as of March 16 (and up 10% from its February 8 low).
That's not a huge gain, but we're talking about what's likely to be a really tough year for stocks—if the US stock indexes delivered 10%, I'd be ecstatic—and not just absolute, but comparative performance. That piddling 2.3% gain on the S&P 500 is a huge 11.5 percentage points above the loss delivered by the Shanghai market this year.
Three Ways to Play the US
I think there are good reasons to expect that this outperformance will continue for somewhere from three to six months.
Do the comparisons and you'll see why:
- On Tuesday, the Federal Reserve's Open Market Committee renewed its promise to keep interest rates at the current 0% to 0.25% target for an "extended period." China could raise interest rates as early as April. Brazil will raise rates this year, as will India.
- US inflation isn't headed anywhere in the short run. Inflation here rose at an annual rate of 2.6% in January. And more important than the absolute number is the direction: US inflation was down from 2.7% in December. In China, on the other hand, inflation spiked to 2.7% in February. That's after dropping to 1.5% in January from 1.7% in December. It's always dangerous to rely too much on any economic numbers that include China's week-long new year holiday, but the size of the jump here clearly worried Chinese leaders, who made the need to fight inflation a key point in their speeches at the recently concluded National People's Congress.
- The Federal Reserve isn't moving to remove stimulus from the financial markets with anything like the speed that the authorities in Beijing are. So far, the Fed has decided to stop pumping more liquidity into such markets as that for mortgage-backed securities, but it isn't actually yet taking steps to pull money out. (For what the Fed has said so far on this, see this recent blog post.) China, on the other hand, has already begun to increase the reserves that banks must keep with the People's Bank of China.
- The US economy is the only game in town if China slows. If growth in China drops to, say, 7% from the 10.7% the country recorded in the fourth quarter, its stock market will tumble. And so will the stock market of every other developing economy. They're all seen as dependent on China's rate of growth. (Why this should be seen as true for India escapes me, but the Indian market moves with China's.) US stocks won't jump for joy, but the US economy is one of the world's least dependent on exports, and the US domestic market is so large that it isn't as strongly correlated with China's economy as, say, that of Brazil.
- Finally, the US economy is out of sync with the economies of the developing world. For much of 2009, that was a handicap as growth picked up in the economies of developing Asia much faster than it did in the US. Now the US is still accelerating (probably), while the governments of China, India, Brazil, and other developing nations are looking to cool growth. Of course, the US isn't going to grow as fast as even a slowing China, but because stocks trade on expectations, the direction of any change in growth rate is more important at this point than the absolute rate itself.
This comparison doesn't guarantee the outperformance of the US market in the short term. As I pointed out in "Eight Reasons for Investors to Worry," an unexpected slowdown in US growth in the first quarter—to be reported in late April—would almost certainly stop any US rally dead in its tracks. But short of that kind of surprise, I think the US stock market is the best in the world for the next three to six months.
So what stocks would I look to add to my portfolio if I needed to add just a bit more US spice to the stew?|pagebreak|
I've got three suggestions:
- Fluor Corp (NYSE: FLR) - The engineering and construction company recently cut its guidance for 2010. Order backlogs had been on a downward trend through 2009. And the company reports that customers are still reluctant to sign on for work. All this means that Fluor is ideally positioned to take advantage of an improving US economy, where industries such as the utility sector have huge backlogs of work they put off in the downturn.
- MetLife Inc (NYSE: MET) - The company has just purchased American Life Insurance (Alico) from American International Group (NYSE: AIG). This purchase of one of the international crown jewels in the AIG portfolio is MetLife's reward for playing it conservatively in the run up to the financial crisis. MetLife is getting Alico for a price that's roughly in line with that of a US life insurer, but Alico's growth rate and opportunities are much greater given the company's position in India, China, and the rest of Asia.
- Union Pacific Corp (NYSE: UNP) - As Warren Buffett said when he bought all of Burlington Northern Santa Fe, a railroad, especially one of the few transcontinental North American railroads, is a bet on the US economy.
Which stock should you buy? If you're pretty much fully invested and just want to try to add a bit of US dash to your portfolio, go with the stock with the most momentum in this group: Union Pacific. I'm adding that to Jubak's Picks today, and will post a more detailed buy later.
If you're looking for more of a value play that might take longer to generate momentum, go with Fluor. MetLife should rebound with the US financial sector as a whole, so if you think you're underexposed to that sector, it's a good choice. Both Fluor and MetLife have enough exposure overseas to give them some legs when US stocks start to fade.
I'm going to add Fluor and MetLife to Jim's Watch List with this column.
At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this column.Jim Jubak has been writing "Jubak's Journal" and tracking the performance of his market-beating Jubak's Picks portfolio since 1997 on MSN Money. He is the author of a new book, The Jubak Picks, and he writes the Jubak Picks blog. He is also the senior markets editor at MoneyShow.com.
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