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Nine Good Bets on the US Economy
11/30/2010 10:24 am EST
The US has the world's most promising economy right now, if only because the rest of the world looks so risky. Buy these stocks while it lasts.
When you're being chased by a bear, you don't have to run faster than the bear; you just have to run faster than the other guy.
Good advice when you're camping in bear country. Good advice, too, when you're thinking about how to allocate your money in today's very chaotic financial markets.
The US economy and stock market don't look especially attractive right now in absolute terms. But they do look a lot better than most of the alternatives. For the next few weeks, couple of months, or maybe as long as a quarter or two, the US stock market and the US economy are the best in the world.
You heard that right: In the short run, that deeply-in-hock, struggling-to-grow, politically dysfunctional United States economy is the best in the world—and you need to make sure you own enough of its stock market to take advantage of that temporary superiority.
How can that be?
Mostly because being the best economy and stock market in the world isn't a very tough test to pass at the moment.
A World of Hurt
Look around at the other contenders.
The European Union? Puh-leeze.
The euro debt crisis has progressed from leaving investors wondering which country will be the next to send shivers of fear through the financial markets to the question of how many euro-toting countries can be in crisis simultaneously.
Currently, the count is two. Greece is about to re-enter crisis (assuming you're willing to say that it ever exited) because Greeks are clinging to a long tradition of not paying taxes. (Alcibiades never paid taxes on his bribes from the Persians, for example.) And it's hard to balance an austerity budget if no one is paying taxes. Ireland is about to pass an austerity budget, but the government that put it together will be out of office by the time it comes time to inflict the pain. No one is certain that the next government won't repudiate the entire package. (For more, see my post "So what happened to the euro relief rally?")
And the count could go to three very soon. The financial markets have stopped lending to Portugal's banks, and Lisbon is totally dependent on the kindness of the strangers at the European Central Bank. No telling how patient that group will be.
China? In the long run, sure, it's a bet I want to take. In the short run? Food inflation. Runaway bank lending. A real-estate bubble that won't deflate. Out-of-control local spending that has, for example, towns of 100,000 bidding for their own high-speed train lines. The only things keeping this all aloft is a financial system that says nobody is bankrupt until Beijing says they're bankrupt—and faith on the part of investors that somehow the government that buried the bad debts of the Asian currency crisis of 1997 will pull more bookkeeping magic out of its hat and enable the markets to kick the problem down the road. But this isn't an economy or a stock market that's looking forward to taking even a tiny dose of medicine. The idea of an additional half- or three-quarter percentage point increase in benchmark interest rates sends the gamblers on the Shanghai market screaming for the door. (For more, see my post "Can Beijing fix its runaway bank lending problem? Does it really want to?")
Brazil, the China of Latin America? Inflation ran at a 5.2% annual rate in the period that ended in mid-November. Banco Central do Brasil will almost certainly raise interest rates in early 2011, and the betting is that the current 10.75% rate will head to 12% or 13% before the end of 2011. Financial markets seem determined to test President-elect Dilma Rousseff even before she takes office on January 1, and they are just waiting to punish the economy if she doesn't start reducing government spending.
India's stock market is high enough to raise fears of a bubble, and the Reserve Bank of India has still been unable to get inflation under control despite a series of interest rate increases.
NEXT: Nine Stock Buys in the (Comparatively) Stronger US Market|pagebreak|
Those Guys Make Us Look Good
Things aren't perfect in the United States by any means, but as I said at the start of this piece, they don't have to be perfect. Just comparatively better.
For example, the US economy grew by just 2.5% in the third quarter, according to revised figures released on November 23. But, hey, that's better than the 2% growth in the earlier set of third-quarter numbers, or the 1.7% growth in the second quarter.
Sure, the Federal Reserve is worried about deflation not too far down the road. (See my post "Core consumer price inflation is still on track for 0%"). But at the moment, the US has a modest but positive 1.2% annual rate of inflation. Certainly not enough to push the Fed into raising benchmark interest rates anytime soon. (Do I hear 2012? 3012?)
The federal budget may be generating horrendous deficits, but the US formal banking system isn't showing any big banks on the verge of a crisis in confidence that would prevent them from raising money in the capital markets. (There are Freddie Mac and Fannie Mae, of course.)
The unemployment rate may be stuck near 10%, but hourly wages and consumer spending are actually creeping upward, and retailers predict a decent holiday shopping season after a dismal 2009.
Take a Long-Term View? Why?
Does all this say that the long-term trend of the US deficit is anything other than dire? Or that the US is about to turn into a job-generating machine in the next decade? Or that the Fed hasn't flooded both the US and the global economies with so many dollars that inflation is almost guaranteed and that the dollar isn't headed downhill in the long term?
Absolutely not. All those problems haven't gone away; they aren't even being seriously addressed; and in fact, while they're neglected they're getting harder to fix.
But who's talking long term? In the long run, as John Maynard Keynes noted, we're all dead. In the slightly less long run, China's economic rise runs head-on into a demographic nightmare as this still-relatively-poor country ages. In the slightly less long run, continued growth in Brazil and India confronts the barriers of low literacy rates and shoddy university training.
But that long run doesn't stop anyone—and it shouldn't—from putting money into China, India, and Brazil today, because those countries have years and years of comparatively superior growth ahead before the obstacles hit the fan.
Think of the United States in a similar light. The US has weeks, perhaps months, of a superior mix of unexpectedly decent growth and temporarily lower risk ahead of it. You should put some money to work—in that time frame—to enjoy that comparative advantage. While it lasts.
Stocks to Own in the Meantime
And the best way to play those weeks or months?
Less than a month ago, on November 1, I suggested retail. (Read "Five Stocks for Your Holiday Shopping List.") I'm suggesting it again. The best retailers will participate disproportionately in the relatively modest improvement in holiday sales. I suggest shares of Apple (Nasdaq: AAPL), Coach (NYSE: COH), Best Buy (NYSE: BBY), Whole Foods Market (NYSE: WFMI) and Amazon.com (Nasdaq: AMZN).
US bank stocks, especially the shares of the big-money-center trading banks, are another way to leverage this end-of-the-year relative superiority. These banks look to see a big pickup in trading revenue this quarter. I'd suggest JPMorgan Chase (NYSE: JPM), Morgan Stanley (NYSE: MS), and, of course, Goldman Sachs (NYSE: GS), the stock so many investors hate to love.
The fourth quarter is usually good for technology stocks, but the only other one I see that combines some momentum with positioning to share in the fourth quarter US "growth surprise" is Hewlett-Packard (NYSE: HPQ).
That's not a long list for the "world's best economy," but then the US isn't likely to keep that title for very long, either.
At the time of publication, Jim Jubak did not own shares of any of the companies mentioned in this column in his personal portfolio. Coach and JPMorgan Chase are members of the Jubak's Picks portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here.
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.